Accounts Payable and Trade Payable: What's the Difference?

Accounts payable and trade payable are usually misinterpreted and used interchangeably. Though similar in many ways, these two terms have different meanings and significance when managing business finance. Understanding the difference between these two terms is essential for effective financial management of your company. 

What is accounts payable?

Accounts payable refers to the money owed to your creditors for goods or services already received. This money is generally due in a short period, ranging from a day to a few months, and hence comes under short-term liabilities. 

For example, if your company employs the consulting services of an individual payable a month after completion, the invoice sent over by the contractor comes under accounts payable. 

Your company's accounts payable team is responsible for processing the invoices and making timely payments. 

The accounts payable team generally extracts data from the invoice and updates the database either manually or with the help of invoice automation software or OCR technology. The team then matches the invoice with other supporting documents before gathering necessary approvals and processing payment. 

What is trade payable?

Trade payable is the money owed to your suppliers to purchase goods or inventory on credit. These goods are generally required for business operations but are paid to the vendor based on an agreed-upon deadline. Trade payable is usually due in a short time, within a year. 

For example, if your company restocks its inventory by purchasing goods from your suppliers on credit, it comes under trade payable. 

Trade payable is paid off according to the due dates or payment terms mentioned on the invoice and processed by the accounts payable department. 

Difference between accounts payable and trade payable

Accounts payable and trade payable are very similar in meaning. However, it is essential to note some key differences between the two terms: 

• Trade payable is a subset of accounts payable for purchases made on credit, directly affecting business operations. Accounts payable encompasses all short-term liabilities for goods and services obtained on credit, such as office supplies or cleaning staff.
• Accounts payable appears in the balance sheet under current liabilities. Trade payable appears in the balance sheet under accounts payable and contributes to the total payable balance.
• Changes in trade payable directly affect the supply chain of the company. Errors in trade payable affect the business functions directly. Accounts payable encompasses all operational expenses; hence, changes in accounts payable affect operational expenses. 
• Changes in accounts payable over time can be used to assess the company's overall financial health. Changes in trade payable can help analyze supply chain functions.

Managing accounts payable and trade payable

Managing payables and ensuring bills are processed on time is an important task. In today's day and age, where cost reduction is a considerable focus, paying your bills optimally at the correct time is essential. Here are a few tips that can help you manage this process: 

Negotiate favorable payment terms

The payment terms mentioned in the invoices must be suitable for maintaining cash flow in your company. Negotiate favorable payment terms with your vendors for the smooth running of your accounts payable process. 

Pay bills on time

Paying your vendors on time is the other obvious task to take care of. Late payments can ruin your vendor relationship and creditworthiness and come with late payment fees and fines. Moreover, paying vendors early often pertains to early payment discounts. 

Manage vendor contracts

Contract management and negotiations are also critical when managing payables. Ensuring that all spend for a particular project obliges to the contracts is crucial and that any uncontracted spend should be dealt with accordingly. 

Invoice matching

Ensuring the validity of invoices is essential to avoid being overcharged or getting caught up in invoice fraud. Matching invoices with relevant documents such as purchase orders, receiving reports and inspection slips can help prevent these issues. 

Review vendor performance

Constantly monitoring and analyzing performance of your vendors is also important for managing trade payable. You should know when a particular vendor isn’t working for your company due to late deliveries, subpar product quality, unfavorable payment terms or price of goods. It is also important to not rely on a single vendor too much to avoid supply chain issues. Onboarding more vendors or switching vendors might be the best plan of action for this scenario. 

Adopt AP automation

Automating your accounts payable or trade payable can help you manage your finances better and capture cost saving opportunities which might otherwise go unnoticed. Accounts payable  automation not only allows you to automate mundane tasks like invoice data entry, obtaining approvals accurately, it also gives you complete visibility into your spends in real time in the form of interactive dashboards. Some AP automation vendors, like ClearTech, also provide important insights like spike in line item amounts and duplicate invoices on the invoice processing screen itself, allowing you to quickly rectify any errors. 

Conclusion

Accounts payable is the money owed to your creditors for purchases already made or received. Trade payable refers to money owed to your suppliers for goods purchased on credit which are directly involved in the supply chain. Both trade payable and accounts payable are short-term liabilities, with trade payable being a part of accounts payable. Trade payable directly affects the supply chain, whereas accounts payable affects overall finances of the company. Managing both these functions are therefore essential for the health of your company. Adopting AP automation software will allow you to automate mundane tasks accurately while gaining complete visibility over your finances. 

FAQs

• What is a trade payable?

Trade payable is the money owed to suppliers for goods purchased on credit. These goods are essential for the business operation of the company. 

• Is trade payable the same as account payable?

Accounts payable is the money owed to creditors for purchases already incurred but not paid. This includes liabilities such as office rent or consulting services. Trade payable is a part of accounts payable only focusing on purchases directly related to business operations or inventory. 

• What is an example of a trade payable?

Purchasing raw materials from suppliers on credit for replenishing the inventory can be considered trade payable. 

• What are the two types of accounts payable?

The two types of accounts payable are trade payable (purchase of goods related to business operations) and expense payables (purchases which count as company expenses, such as rent or salary.)