Debtors vs Creditors
While purchasing goods on credit a buyer may not make the payment immediately instead both the seller and buyer may enter into a lending & borrowing arrangement. This allows delayed payments for current invoices. Even though payment terms are mutually agreed upon there is still a difference between debtors and creditors.
Typically such agreements involve a short interest-free credit period during which the buyer can make its payment. Debtors and creditors may be defined as follows;
Debtors – In a business scenario, a person or a legal body who owes money to another party is called a debtor. For a business, the amount to be received is usually a result of a loan provided, goods sold on credit, etc.
Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from X to use as raw material for their clothes manufacturing business. The total invoice amount of 100,000 was not paid by Unreal corp. In this example, Unreal corp. is a debtor for X.
Creditors – In day to day business a person or a legal body to whom money is owed is known as a creditor. For a business, the amount to be paid may arise due to repayment of a loan, goods purchased on credit, etc.
Example – Unreal corp. purchased 1000 kg of cotton for 100/kg from X. The total invoice amount of 100,000 was not received immediately by X. In this example, X is a creditor for Unreal corp.
Difference Between Debtors and Creditors (Table Format)
|1. Debtors avail credit facility as they borrow.||1. Creditors extend credit as they act as lenders.|
|2. It is a current asset for the business.||2. It is a current liability for the business.|
|3. Debtors are a result of credit sales by the business.||3. Creditors are a result of credit purchases by the business.|
|4. Discount is allowed to debtors.||4. Discount is received from creditors.|
|5. Total amount to be received (total debtors) is also known as Sales Ledger Control.||5. Total amount to be paid (total creditors) are also known as Purchase Ledger Control.|
|6. Collectively they form the company’s accounts receivables.||6. Collectively they form the company’s accounts payables.|
|7. Also known as Trade Debtors or Trade Receivables.||7. Also known as Trade Creditors or Trade Payables.|
|8. A provision for doubtful debts is created for debtors.||8. No such provision or reserve is created.|
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