Debtor

In general terms, a debtor is one who is indebted to the entity, in the form of an individual or a firm, a government or a company, etc., who owes money for the products or services sold to him. For example, if A borrowed money from B and he is entitled to pay it back to B after a specific duration, then in this condition, A will be the debtor, and B will be a creditor. In the case of Businesses when the credit sale incurs the customer shall become the debtor.

Who is a Debtor?

• An individual, a firm, a corporation, or a government who owes payment of any kind, be it in the form of cash or securities to the business
• Customers who have purchased goods and services on credit are called debtors, and the suppliers are called creditors
• A debtor is also someone who borrows money from a bank or money lender

More Insights on the Debtor

It is not a crime to fail to pay a debt. Except in some instances such as bankruptcy situations, payments are prioritised for debt repayments as per the provisions of law, but if they are at fault to honour of the terms of their debt, they may face fees and penalties as well as a decline in their credit scores. Additionally, the creditor may take the debtor to court over the matter, leading to liens or encumbrances.

Also, there is usually a term associated with debtors, which means an obligation that requires one party (debtors) to pay money to the party who has given the amount (creditors). If you take money from a moneylender with an agreement of repaying it with interest, it is also called debt. Here the moneylender is the creditor, and the borrower is the debtor.

Debtor vs. Creditor

The word creditor is derived from the Latin word “credit,” which means “to loan.” A creditor or lender is a party to whom money is owed. A creditor can be an individual, organisation, company, or government. The first party, in general, has provided some service or property to the second party under the assumption and trust of getting back the amount that has been lent.

The term creditors are usually associated with short-term loans, long-term bonds, and mortgage loans. Creditors account to receive the money. They come under the liability category in the balance sheet of the company. Creditors offer discounts to the debtors to whom they extend the credit.

Whereas debtor is also derived from the Latin word “debra,” which means “to owe,” and it is the party who must pay money to the first party (creditors). They account to pay the money. They come under the asset category in the balance sheet of the company. Also, the discount can be allowed to debtors by the person who extends the credit.

The relationship that a debtor and a creditor share complements the relationship that a customer and supplier share. Anyone to whom you as a business have to lend in any way, including unpaid invoices on products and services provided to clients, are considered as your trade debtors.

What are Bad Debts?

• It is the amount that is uncollectable or irrecoverable
• In simple terms, it is the amount of debt that is not possible to collect or recover
• When you are sure that the amount you lend will not get recovered, it eventually becomes ‘a bad debt’
• The definition of bad debt remains the same, but its treatment will be different in accounts
• We know that the bad debt should be treated as a loss and should be adjusted against the profit
• In other words, the amount of bad debt will go as “bad debts” under the Profit and Loss account.
• Example of bad debt: Suppose a company sells goods on retail to a retailer for 60 days’ credit
• The company has recorded accounts receivable in its balance sheet and has also recognised the revenue
• After 60 days, the company realises that the debtors have gone bankrupt and will no longer pay the debt
• Thus, the money is irrecoverable and is now considered bad debt
• There is also a provision for doubtful debts, which means the debts which carry an uncertainty of collection
• When one realises that debtors won’t pay, he must enter the same in the account

Does Bad Debt matter?

Yes, it does matter for any organisation that has to operate in the long run to maximise its profit as the judgments of a company’s performance are based on the financial statements. So, one has to come up with accurate figures of the assets and revenues and try to avoid bad debts as much as possible.

Conclusion

Business transactions, at their simplest, have two parties involved, the debtor and the creditor. In short, a creditor is someone who lends money, whereas a debtor is someone who owes money. Creditors extend the loan or credit to a person, organisation, or firm. At the same time, debtors take the loan and, in return, have to pay back the money within the given time frame with or without interest. To ensure the smooth flow of the working capital, the company keeps tracking the time lag between the receipt of payment from the debtors and payment to creditors.