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Debtors & Creditors Explained

What's A Creditor or Debtor?

By accotax - london accountantPublished 3 years ago 3 min read
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Every business, however large or small, needs to keep close tabs on debtors and creditors. In simpler terms, that means understanding what your business is owed and what it owes.

On the surface, creditors and debtors appear to be straightforward phrases, but the practicality of how the two phrases might be used can rapidly become perplexing, especially if you are a small firm. It's easy to get these terms mixed up, as it is with many other financial words, so it's crucial to know the difference.

The business world is based on credit. Virtually every business relies on access to goods, services and finance before paying in full for them. As a result, there are debtors and creditors. To run a business properly, it is essential to be 100% clear about the meaning of the two terms.

What is a debtor?

Debtor meaning: This is money that is owed to the business. For example, where a client or a customer has received an invoice for goods and services but this has not yet been paid.

What is a creditor?

Creditor meaning: This is money that is owed by the business. For example, where the business has been invoiced for goods or services but has not made payment.

Debtors and creditors

Debtors and creditors can be thought of as two sides of the same coin. Debtors are frequently businesses and individuals who have received sales invoices, but have not yet paid them. From a bookkeeping point of view, it is essential to keep accurate records of paid and unpaid invoices.

Debtors, creditors and cash flow

As professional accountants, we advise our clients on maintaining accurate balance sheets and closely related cash flow statements. Balance sheets give a snapshot of the financial position of a business at a given moment in time. They are vital for good financial management, and are a key tool in managing the critical business discipline of maintaining a positive cash flow.

What is a trade debtor?

Trade debtors are customers and clients for whom you have provided goods or services without yet receiving payment. Reliable customers who pay on agreed timescales do not present a problem, but late payments can create serious problems. The larger the debt, the larger the potential problem.

What are other debtors?

Balance sheets will also feature an entry for 'other debtors'. This is where businesses record payments due from organisations which are not customers - a repayment from HMRC, for example, or any loans made to other businesses.

What are trade creditors?

Trade creditors are suppliers which have provided your business with goods and services for which you have not yet paid. Trading terms agreed with the supplier will dictate when payment is due. Some businesses aim to create positive cash flow by having longer credit terms than debt terms.

What are other creditors?

Other creditors listed on a balance sheet covers sums due to other entities. This could include loans from directors, especially in small businesses, put in place to help cash flow.

Are you in control of your debtors and creditors?

It is impossible to overstate the importance of keeping the closest possible control of revenues and outgoings in any business. Get it right and your business has a solid foundation for future prosperity. But if you don't, you risk joining the huge list of businesses which fail within a few years of starting up.

Conclusion

At their most basic level, business transactions include two parties: the creditor and the debtor. In simple terms, a creditor is someone who lends money, whereas a debtor owes money to a creditor. A corporation can ensure a smooth flow of working capital by keeping track of the time lag between receipt of payment from debtors and payment of money to creditors.

For a free consultation on how Accotax London Chartered Accountants can help your business manage creditors and debtors and thrive, contact us now.

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About the Creator

accotax - london accountant

ACCOTAX are mainly popular for taxation and accounting firm service provider in London. And where they provide stress free accounting, and taxation services.

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