What you owe
These days many business can enjoy credit terms from their suppliers. This period of credit, often known as Terms of Trade, can vary significantly from zero to 180+ days. The value of the amounts remaining unpaid at any time are commonly known as Accounts Payable or Trade Creditors and the period taken on credit as creditor days.
Accounts payable values will be found on a balance sheet in the Current Liabilities section. They are current in that normally the amounts will be paid out in a relatively short time period.
Suppliers will usually only offer credit once the credit worthiness of the business has been investigated.
Usually this investigation may well involve a credit check. From time to time it would be useful for the business to check it own credit score so as not to be caught out by an unexpectedly poor one.
When credit terms are taken from suppliers than in accounting terms we have created a liability for the funds to be paid out in the future. For example the equations for a £1000 bill on credit would be:
When eventually the is bill is paid to the supplier the liability type would move from being an amount payable to a reduced amount in the bank account (a reduction in assets).
Settlement Discounts offered
Suppliers sometimes offer settlement discounts for earlier payment than the agree terms.
This then is a trade off between the value of the discount and the cost of money the business enjoys.
Simplistically the cost of money would be the interest rate associated with any loans or overdrafts or interest rate forgone on cash amounts the business has.
For example on a bill for £2000 the supplier offers a settlement discount of 2.5%, a benefit of £50.00. However the business is running an overdraft that costs 8.1% per annum or 0.15% per week. So the benefit of having say seven weeks credit on £2000 would be not having to pay £3.00 week in interest or £21.00 for the seven weeks. So in this case paying earlier and taking the discount benefits the business.
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