Debtor and Creditor: How Do They Differ?

Debtor and Creditor: How Do They Differ?

Managing finance involves figuring out which box you will tick in terms of debtor and creditor. You must know that these are the two main parties involved in any commercial transaction and mainly indicate a situation or an event where money is exchanged. A creditor is a lender who provides money, and a debtor is the one who receives the money and pays it back with interest in due time. 

However, it is to be noted that not all businesses create debtors and creditors equally. Some businesses owe money to creditors, and some may have creditors owing them the money. In this article, we will highlight some of the differences between these two groups and how the terms debtor and creditor in accounting have a massive role to play in the daily lives of businesses. Let's dive in!

Did you know? The debtor-creditor relationship can either be voluntary or involuntary.

What Is a Debtor?

A debtor is someone who in the past might have borrowed money from someone and currently owes it back to the same person or entity from whom he had borrowed. It is like when you borrow money from friends or family members or colleagues for some time to make payments for goods or services because you don't have enough money to spend. There are two types of debtor accounts at the accounting level: the balance sheet and the income statement. 

 

One example of explaining the debtor vs creditor concept is if you have lent your friend ₹30,000, and they have not paid back the money, then they are your debtor, and you are their creditor.

Also Read: Costing: Definition, Objectives, and Advantages

What is a Creditor?

A creditor is a lender who lends you money, such as a credit card company to whom you owe money. These creditors include individuals, businesses, or huge entities like government companies and foreign corporations. Such people and businesses are creditors because they provide you with a loan or, in other cases, even goods and services with no instant payments. 

Few of the creditors, for example, could be the supplier of raw materials to a manufacturing company. The supplier, in this case, is the creditor because it supplied the needed materials to a manufacturing company on credit. Thus, the manufacturing company owes money to the supplier, who, in this case, is the creditor.

A Sundry Creditor is a person who provides goods or services to a business on credit, does not immediately get payment from the firm but is still obligated to receive the payment in the future.

 

Significance of Debtor and Creditor in Accounting

In accounting, debtors and creditors are the two main parties in any transactions of businesses. The debtor is the party who owes money to the creditor, while the creditor has to receive money from the debtor. There are certain responsibilities of debtors that they need to know and fulfil diligently.

Both debtor and creditor roles are important because they determine the position of the parties involved in the financial transactions of a business. 

The debtors and creditors are critical to the accountants as they give them essential account-related information. They help an accountant calculate how much money the company owes to its creditors and how much of it is owed from the debtors. 

In addition, debtor and creditor in accounting are always recorded on the balance sheet as significant financial items. Through this balance sheet, one can know and describe the financial standing of the company and the parties concerned.

Moreover, the legal right to sue is the distinguishing characteristic of the debtor vs creditor relationship. If the debtor fails to repay the borrowed money, the creditor has all the legal rights to sue the debtor to recover the debt amount. Likewise, if the company is not in a good financial position, the creditor can demand to pay back the money from the company that owes the debt.

Also Read: Accounting Period - Definition, Types & How Does an Accounting Period Work?

Difference Between a Debtor and a Creditor

After looking into the meanings of the debtors and creditors, you should know by now that entities running businesses need these two parties for their financial transactions. Without accurate information about the financial position of the company, external and internal users could be misled about the data needed to make informed decisions about investments. So, let's look at the following points that cite the differences between the debtor and creditor.

  1. The debtor is any person or company who owes you money, and the creditor is any person or company to whom you owe money.
  2. The debtor, in financial books and reports, always has a debit balance, while creditors have a credit balance in nature.
  3. From the debtors, you receive money and other payments, while from the creditors, you pay back the loan with a certain sum of interest.
  4. In the balance sheet, debtors are shown as assets under the head 'current assets' while creditors are shown as liabilities under the heading “current liabilities”. 
  5. Debtors are known as accounts receivable, whereas creditors are known as accounts payables. 
  6. The term debtor has been derived from the Latin term 'debere', meaning debt, while the term creditor comes from the Latin root 'creditum'.
  7. No provision for the doubtful debt exists for creditors, whereas, for the debtors, there is a need for such provision.

Also Read: What is an Accounting Transaction? Example & Types of Accounting Transaction

Debtor Vs Creditor

 

Now, let's summarise the difference between the debtor and creditor in a tabular format. They are as follows:

Basis of Difference

Debtor

Creditor

Meaning

Any person or company owing you money.

Any person or company to whom you owe money.

Type of Balance

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