Trade and Other Payables (IAS 32) summarises buying on credit and how to recognise these transactions in the accounting records. This document explains the definition, classification, and recognition criteria of trade and other payables.
Trade and other payables
Why do businesses buy on credit?
• Cheaper than borrowing money from the bank and then using the money to pay
supplier in cash.
o Suppliers usually don’t charge interest under the normal credit terms period)
• People would rather get something now and pay later.
o Time value of money.
• May be buying from multiple locations, but want to pay from a head office.
o Internal controls of cash.
• Have time to sell inventory first and get cash before you pay the supplier.
o Cash flow and liquidity.
o Cash in the bank can earn interest.
Nature of trade payables:
What is trade payables?
• Money that you owe the supplier for inventory/ stock that you bought on credit
from the supplier.
What element is trade payables?
• A liability:
o A present obligation (contractual duty)
o to transfer economic resources (cash)
o as result of past events (buying on credit)
IAS 32 definition:
• Trade payables are a financial liability.
Financial liability = a contractual obligation to deliver cash.
• An entity has a contractual obligation (per the contract entered into with the
supplier to buy on credit)
• To settle the debt (with cash) they have
• due to the credit purchases they made
Therefore, it meets the definition of a liability.
, Recognition criteria:
To be recognised, the information must be relevant and faithfully represented:
• The information is relevant:
o No existence uncertainty.
o There is a high probability of an outflow of economic resources.
• The information is faithfully represented:
o No measurement uncertainty.
Therefore, trade payables meet the definition of a liability as well as the recognition criteria
and can be recognised in the financial statements of an entity.
Classification of trade payables:
An entity shall classify a liability as current when: (or-test)
• It expects to settle the liability in its normal operating cycle, (form part of working
capital)
• It holds the liability primarily for the purpose of trading,
• The liability is due to be settled within 12 months after the reporting period; or
• It does not have the right at the end of the reporting period to defer settlement of
the liability for at least 12 months after the reporting period.
An entity shall classify all other liabilities as non-current.
It expects to settle the liability in its normal operating cycle
• Normal operating cycle: average amount of time it takes for a company to acquire
inventory, sell the inventory, and then receive cash from its customers in exchange
for this inventory sold (less or more than 12 months).
Therefore trade payables is a current liability.
Purpose of supplier's reconciliation:
• To reconcile the amount owing to the supplier, as reflected in our books (customer)
and the supplier's statement (in supplier's books).
• Reconciliation statement then becomes remittance advice = informs the supplier
how the firm arrived at the amount of payment.
Supplier's reconciliation statement:
• Monthly basis = suppliers send statements to customers - indicates the transactions
that occurred in the month + balance outstanding.
• Before customer pays = statement is checked to ensure its correct.
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