Concepts Behind Debtors And Creditors

In running the operations of a business, it is recurrent and routine to provide goods on credit and also accept certain goods on credit. The person who provides the goods on credit is called the creditor while those who accept the goods are called debtors. The current liabilities of a company is therefore, based on the debtors and they owe the company a certain amount which is dependent on the principal amount repayable with interest being added depending on the type of company they have obtained goods from.

A creditor is the opposite of the debtor for whom the company has the obligation to pay an amount of money which is due either due to goods purchased from creditors or services availed from them.

Any amount received from the debtors is categorized under accounts receivable while the amount due to the creditors come under the division of account payable. While the debtors are classified under assets in a business, the creditors are tabulated under liabilities.

Sometimes the business concern offers discounts to debtors, especially in case of credit transactions involving shorter periods of time so that these discounts are classified under Discounts Account, while the business enterprise aims at availing discounts from the creditors for prompt repayment of amounts obtained in the form of short-term loans or from the purchase of goods.

If the debtors fail to provide the amount of money for the goods supplied by the business concern over a long period of time, the sum which is due from them is categorized under bad debts and in the long run it is written off by the company while the same cannot be done for the sum owed to the creditors by the company.

Usually in order to avoid the concept of bad debts a collateral security which is known as lien is usually obtained by the creditors from the debtors and this amount will be equal in value to the amount of money borrowed by the debtors from the creditors. The business may obtain such a lien from its debtors and provide lien to the creditors.

The interest levied on the debtors and payable to creditors depend on the type of business establishment. If it is a financial firm, it may choose to levy greater than 9% interest, while a non-financial trading firm might adhere to the 9% interest value.

A typical example of a debtor creditor relationship can be considered as a business organization availing loan from a bank for its operations. In this case, the business is deemed to be the debtor as it has borrowed a sum of money while the bank becomes the creditor. The bank levies a fixed rate of interest, say 9.5% on the principal amount given to the business. The interest calculated at 9.5% in addition to part of the principal amount is returned on a monthly basis to the bank which forms the EMI and based on equal monthly installments, the loan repayment is scheduled by the debtors to the creditors.

Difficulties Encountered In Debtors And Creditors

Though the principles of Debtors and Creditors seem simple to understand, under practical applications it will be difficult to understand in particular circumstances as to who will act as debtors and which concern will be a creditor as sometimes as in the case of Sales Returns and Purchase Returns are concerned, it is confusing as to who should be credited, whether the concern returning the goods or the concern which is accepting the returned goods. The students might have trouble in accounts receivable and payable when dealing with creditors and debtors. The concept of bad debts should be thoroughly understood by the students and they should learn as to how it should be reflected in the final Balance Sheet of the company without implicating much damage to the concern. The students should also make themselves aware of the purpose of collateral security which is a bond signed between the creditor and debtor and know how to answer questions based on such liens.

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