Accounting Considerations

In the case of transactions that involve Trade Credit, including Trade Credit in your accounting system is straightforward and there are a number of clear guidelines to follow:

Receiving Trade Credit in return for assets

  • Your company and Active enter into a mutual Sale and Purchase contract for the asset
  • You raise an invoice for the sale of the inventory at the agreed Trade Credit value
  • The asset value in the balance sheet is usually replaced by a pre-payment for the Trade Credit issued
  • The Trade Credit is typically carried in the balance sheet at the net realisable value of the asset surrendered in accordance with GAAP

Spending Trade Credit

  • When your company purchases media and other business services, Active raises invoices which are payable part in cash, part in Trade Credit
  • GST is charged at the required rate for the value of the media or services provided
  • As Trade Credit is spent, an equal amount is credited to the prepayment account and then to the Profit and Loss account, until all Trade Credit is spent