In the normal course of business, goods are bought and sold on credit, which is not a new thing. Selling and purchasing of goods on credit change the relationship between buyer and seller into debtor and creditor. Debtors are the one, to whom goods have been sold on credit, whereas Creditors are the parties who sold the goods on credit. They both are relevant for an effective working capital management of the company.
Debtors are an integral part of current liabilities and represent the aggregate amount which a customer owe to the business. On the contrary, a creditor represents trade payables and is a part of the current liability. A creditor is a person or entity to whom the company owes money on account of goods or services received.
So, there is a fine line of differences between debtors and creditors which we have discussed in the article below, take a read.
Content: Debtors Vs Creditors
|Basis for Comparison||Debtors||Creditors|
|Meaning||Debtors are the parties who owes debt towards the company.||Creditors are the parties to whom the company owes a debt.|
|What is it?||It is an account receivable.||It is an account payable.|
|Discount||Allowed to debtors.||Received from creditors.|
|Derived from||Term 'debere' of Latin language which means 'to owe'.||Term 'creditum' of Latin language which means 'to loan'.|
|Provision for doubtful debts||Created on debtors||Not created on creditors.|
Definition of Debtors
In general, debtors are the parties who owes debt towards the company. The parties can be an individual or a company or bank or government agency, etc. Whenever an entity sells its goods on credit to a person (buyer) or renders services to a person (receiver of services), then that person is considered as Debtor and the company is known as a creditor.
The word ‘debtor’ is derived from a Latin word ‘debere’, which means ‘to owe’. In this way, the term debtor means the party who owes a debt which needs to be payable by him in short duration. Debtors are the current assets of the company, i.e. they can be converted into cash within one year. They are shown under the head trade receivables on the asset side of the Balance Sheet.
Before allowing goods on credit to any person, first of all, the company checks his credibility, financial status and capacity to pay. Credit policy is made by the management of the company which takes decisions regarding credit period allowed to debtors as well as discount allowed to them for making early payments. However, still, there is a possibility that some debtors fail to pay the sum in time for which they have to pay interest for making a late payment.
Moreover, provision for bad debts is created on debtors, in case if a debtor become insolvent and only a small part is recovered from his estate.
Definition of Creditors
Creditors are the parties, to whom the company owes a debt. Here, the party can be an individual or a company which includes suppliers, lenders, government, service providers, etc. Whenever the company purchases goods from another company or services are provided by a person and the amount is not yet paid. Then that individual or company is regarded as the creditor.
Creditors are the current liabilities of the company, whose debt is to be paid within one year. They are called as current liabilities because they provide credit for a limited time and hence, they should be paid, shortly. Creditors allow a credit period, after which the company has to discharge its obligation. But, if the company fails to pay the debt within the stipulated time, then interest is charged for delayed payment.
They are shown on the liabilities side of the balance sheet under the head trade payables. The following are the division of creditors:
- Secured Creditors: The creditors who provide debt after pledging the asset as security. They are paid first.
- Unsecured Creditors: The creditors whose debt is not backed by any security.
- Preferential Creditors: They are the creditors who get priority over unsecured creditors for repayment of debt. They are tax authorities, employees, etc.
Key Differences Between Debtors and Creditors
The following are the major differences between sundry debtors and sundry creditors:
- Debtors are the parties who owed a sum of money towards the entity. Creditors are the parties, to whom the company owes an obligation.
- Debtors come under the category of account receivable whereas Creditors come under the category of account payable.
- Debtors are the assets of the company while Creditors are the liabilities of the company.
- The Latin meaning of debtor is ‘to owe’. Conversely, the Latin meaning of creditor is ‘to loan’.
- In the case of Debtors, the discount is allowed by the company. On the other hand, in the case of Creditors, the discount is received by the company.
- Provision for doubtful debts is created on debtors, but not on creditors.
Sundry Debtors and Sundry Creditors are the stakeholders of the company. For an efficient Working Capital cycle, every company maintains a time lag between the receipt from debtors and payment to creditors. So that, the flow of working capital will go smoothly.
If a company owes money to another company. Then the former company will be debtor while the latter company is the creditor. They are the two parties to a particular transaction and hence there should not be any confusion regarding these two anymore.