Everything you need to know about Creditors and Debtors
As much as two terms may seem simple and easy to remember, understanding the debtors and creditors concept is a quandary.
Ernest & Co Accountants is here to help you get a better grasp of the above accounting concepts.
What is a Creditor?
A creditor is a bank or person that loans out money with the incentive of making money on credit offered usually through interest charges.
As a business owner, there are two types of creditors you are likely to deal with:
- Trade creditors.
Creditors in examples
- If you have taken out a car loan, the bank is the creditor.
- For a shopkeeper, when the buyer takes goods and promises to pay later. The shopkeeper is the creditor.
The difference between debtor and creditor is clear. Let me guess, if you’re reading this piece, you are very likely to be the debtor. A debtor borrows money from the creditor. Funny right!
What is Debtor?
Suffice to say debtor is an individual or a business entity that owes money to another entity because they received borrowed money, services or goods from an institution.
As a business owner, you should be aware of two types of debtors. Namely:
- Staff loans
- Trade debtors
Debtors in examples
A logistics company that borrows money from the bank to acquire new fleets is an example of a debtor. Consequently, they become debtors as they will owe the borrowed money with interest to the bank.
Debtors and Creditors in a Small Business
Depending on the nature of your business, you are either a debtor or have debtors. Being a creditor for another business may be considered an asset. Therefore, demonstrating financial strength to your business, while excessive debt acts as liabilities.
The relationship between the two terms is equally important for small businesses as they affect assets and liabilities on your balance sheet and the resultant business cash flow. These two are part of working capital management and how they are effectively managed can play an important factor in how the operations of the business are run.
Essentially you would want your debtors paying early so that you are able to cover your liabilities that include trade creditors and bank loans. It is important to keep a tight leash on the debtors to ensure that they pay on time, this is referred to as Credit Control. At Ernest & Co Accountants, we can help with credit control to aid cashflow and working capital management. We are just a bell away.