Definition of Trade Debts

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A trade debt occurs when a company buys now and pays later.
A trade debt occurs when a company buys now and pays later. (Image: Tzido/iStock/Getty Images)

A trade debt in the business world is an account payable. It is the money one company owes another for a good or service received but not yet paid for. These obligations are usually paid between 10 and 90 days, and in accounting, are considered current liabilities for the purchasing company.

Trade Debts Impact on Accounting

Conducting business with trade debts is essentially suppliers selling their goods and services on credit rather than for direct payment. The advantage of selling on credit is the potential for increased sales revenue because companies can purchase goods prior to having the money to pay for them. Another benefit of selling goods on credit is that it augments the supplier’s accounts receivable, which is an asset reported on balance sheets, even though the money has yet to be received. A disadvantage of suppliers using the trade debt method of sales is that the purchasing companies can fail to pay for the goods and services they have received. When this happens, the supplier’s income statement sustains a loss and its balance sheet experiences diminished accounts receivable.

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