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written by | August 9, 2022

Debtor and Creditor: How Do They Differ?

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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

Debit balance

Credit Balance

Type of Contract with the Party

You receive money or other payment from the debtor.

You pay back the loan with interest to the creditor.

Type of Balance Sheet Item and Head

A debtor is shown as assets under the head's current assets.

A creditor is shown as liabilities under the head's current liabilities.

Alternative Name

It is also known as Accounts Receivables.

It is also known as Accounts Payables.

Origin

It is derived from the Latin root “debere”.

It is derived from the Latin root “creditum”.

Offer of Discount

A debtor receives a discount from the creditor.

A creditor is the one who provides and offers discounts.

Provision for Doubtful Debts

Provision of doubtful debts is created in the case of debtors.

There is no creation of doubtful debts in the case of creditors.

Also Read: What are the Responsibilities of Debtors?

Conclusion:

In the accounting field, debtors and creditors have significant roles to play, and both are two different categories of accounts in accounting. The debtor is any person or company that owes you money, and the creditor is any person or company to whom you owe money.

Also, most of the time, auditors need to look at the standing amount of debtors and creditors through the company's financial statement. These are interdependent and equally essential for the accounting process. A debtor without a creditor cannot exist and vice versa.

Lastly, we hope that through this article, we have been able to provide detailed insights into the various aspects and differences between debtors and creditors.

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Why is a bank both debtor and creditor?

Ans:

Banks are referred to as debtors and creditors because banks accept and charge interest on different types of deposits from the public, such as savings or term deposits. Ultimately, they need to repay these deposits to the depositors with the amount and interest deposited over time. 

Q: Is a bank a debtor?

Ans:

If a bank has taken a loan from the government, yes, it’s a debtor. In this case, the government is a creditor. 

Q: Can a customer become a debtor and creditor simultaneously?

Ans:

A customer purchasing goods on credit becomes a debtor owing money to the one from whom he bought the goods. However, such a customer cannot become a creditor simultaneously because he cannot buy goods from himself and owe money to himself.

Q: Who are called debtors?

Ans:

Debtors are those individuals or entities who purchase any goods or services on credit and for which they owe money in return.

Q: What is the difference between debtors and debts?

Ans:

The debtor is any person or company that owes you money, while a debt refers to a borrowed loan from a bank or any institution.

Q: Who is a debtor and creditor? Explain with an example.

Ans:

A debtor refers to the person or firm who is obligated to pay money to the creditor. A creditor refers to the person or entity who extends credit to the debtor. 

For example, when company AI lends money to company KK, AI assumes the role of creditor, and KK is the debtor. When company KK sells goods to company AI on credit, KK is the creditor, and AI is the debtor.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.