Debtor vs. Creditor
These are two contrasting terms where one is considered an asset and the other a liability.
What is Debtor vs. Creditor?
The two essential terms in accounting for the company are debtors and creditors. These are two contrasting terms where one is considered an asset and the other a liability.
While accounting for any transaction, debtors and creditors are the two terms used for journal entries for interpreting the transaction in the books of accounts.
People who are assets for a corporation are referred to as debtors since they either owe the company money or need to repay it in the future.
What is a Debtor?
A debtor, often known as a debtor, is a legal individual or organization that owes money to another. A person, company, government agency, corporation, or other legal people could be the entity. A creditor is a name given to the opposing party.
When a bank acts as the counterpart to a debt arrangement, the debtor is usually referred to as a borrower.
What is a Creditor?
Creditors refer to the people considered a liability, meaning they are the ones to which the company is obliged to pay back the amount borrowed in trading goods and services.
Generally speaking, the first party has given the second party some goods or services with the understanding (typically enforceable by contract) that the second party will give back goods and services of equal value.
Frequently, the second party is referred to as a debtor or borrower. The first part is referred to as the creditor, who is the one who has lent money, goods, or services.
The company holds a lot of debtors and creditors in an accounting period and needs to record them in the financial statements or reports for a specific accounting period. Each debtor and creditor has a vital role in preparing the financial statements.
The debtors have a debit balance, and the creditors have a credit balance in the accounting process.
Examples of Creditor and Debtor
To clarify the meaning and explain the transaction related to the company's creditors and debtors while preparing the firm's financial reports for the accounting period.
1. Example for Creditor
For example, if the company bought machinery on credit from Comfort Ltd. for $25,000, then Comfort Ltd. would be a creditor for the company, and the following journal entry will be made:
Journal entry for the year ended 31st March 2020
| Dr. Machinery | $25,000 |
| Cr. Creditors (Comfort Ltd. ) | $25,000 |
Now, this is represented in the balance sheet in the following way:
Balance sheet for the year ended 31st March 2020
| Liabilities and Equity | |
| Current Liabilities: | |
| Creditors (Comfort Ltd. ) | $25,000 |
2. Example for Debtors
Another example that constitutes a debtor is: The company sold goods on credit to ABC Ltd. for $50,000, then ABC Ltd. is a debtor who needs to pay the amount in the future to the company, or the company will receive money from it, which is considered an asset.
The following journal entry is passed:
Journal entry for the year ended 31st March 2020
| Dr. Debtors (ABC Ltd. ) | $50,000 |
| Cr. Goods | $50,000 |
Now, this may be represented in the following way in the balance sheet:
Balance sheet for the year ended 31st March 2020
| Assets | |
| Current Assets: | |
| Debtors (ABC Ltd.) | $50,000 |
Debtor vs. Creditor
The following are the significant differences between debtors and creditors which should be kept in mind while preparing the financial reports for the company.
| Basis | Debtors | Creditors |
|---|---|---|
| Meaning | Any person or entity obliged to return the money owed to an organization. | Any person or entity to whom the debtor is liable to pay the money or company must pay back the borrowed amounts. |
| Nature | Debit balance | Credit balance |
| Payments | Payments are received from them. | Payments are made to them. |
| Representation | It is represented as a current asset on the asset side of the balance sheet. | Shown as current liabilities in the equity and liabilities on the balance sheet. |
| Account | It is an account receivable | It is an account payable |
| Allowance of discounts | Discounts are allowed by the creditors or the organization for whom the debtors need to pay money. | They offer discounts to the debtors. |
| Also known as | Sundry debtors | Sundry creditors |
| Examples | Goods sold to customers on credit. | Machinery bought on credit. |
As a result, the distinction between a debtor and a creditor is that the former lends money in a credit relationship while the latter borrows. It is considered that debtors and creditors are mutually exclusive.
Debtor vs. Creditor FAQs
Some ways to manage debtors are making sure of the invoice issued, automating your billing and collection of debt, knowing your terms and making them clear, and knowing your customers.
The main advantage of the debtors is that they can help increase the business's sales.
There are two types of creditors: secured and unsecured.
The creditor is considered a current liability on the balance sheet and has a credit balance.
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