Journal entry for trade payable

Introduction

Trade payable is a type of current liability on the balance sheet that represents the payment obligation that we need to make in the near future. In this case, we need to make the journal entry for trade payable in order to account for such payment obligations that usually exist at the time when we make credit purchases from another party.

In accounting, the trade payable is also known as accounts payable; hence these two terms, trade payable and accounts payable, are usually interchangeable with one another. This is because the trade payable and accounts payable have the same nature as the current liability on the balance sheet, in which we will need to settle in the near future.

The payment obligation that exists in form of the trade payable usually starts when we purchase the goods on credit or on the account. Likewise, we usually need to make the trade payable journal entry starting with the inventory account or purchases account depending on whether we use the perpetual inventory system or periodic inventory system.

Journal entry for trade payable

We can make the journal entry for trade payable by debiting the inventory account and crediting the trade payable account if we purchase the merchandise goods on credit under the perpetual inventory system.

Perpetual inventory system:

Account Debit Credit
Inventory $$$
Trade payable $$$

This journal entry of trade payable will increase both total assets and total liabilities on the balance sheet at the same time.

However, if we use the periodic inventory system, we can make the journal entry for the trade payable with the debit of the purchases account and the credit of the trade payable account as below instead:

Periodic inventory system:

Account Debit Credit
Purchases $$$
Trade payable $$$

Later, when we make the payment on trade payable, we can make the journal entry to eliminate this liability by debiting the trade payable account and crediting the cash account.

Account Debit Credit
Trade payable $$$
Cash $$$

This journal entry will eliminate the trade payable that we have recorded after making the credit purchase of the merchandise goods from our suppliers previously.

Trade payable example

For example, on June 30, we make a $10,000 credit purchase of merchandise goods from one of our suppliers. Later, on July 31, we pay $10,000 for this credit purchase to our supplier to fulfill the payment obligation that has existed as a result of the credit purchase that we made on June 30 previously.

We use the perpetual inventory system to manage the movement of the inventory goods in our business.

In this case, on June 30, we can make the journal entry and record the $10,000 credit purchase of merchandise goods by debiting the $10,000 to the inventory account and crediting the same amount to the trade payable account.

June 30:

Account Debit Credit
Inventory 10,000
Trade payable 10,000

This journal entry of trade payable will increase total assets by $10,000 as a result of the inventory increase by $10,000 as of June 30. At the same time, the total liabilities increase by the same amount for the $10,000 increase of the trade payable on the balance sheet.

Later, when we make the $10,000 payment to our supplier on July 31, we can make the journal entry as below:

July 31:

Account Debit Credit
Trade payable 10,000
Cash 10,000

This journal entry will reduce both total assets and total liabilities on the balance sheet by $10,000 as of July 31.