Whether you are involved in accounting sector or not, but sooner or later you might have come across two terms – creditors and debtors. The terms are quite simple when you read but believe me people often get confused between these terms and search for the real meaning behind it. Unsurprisingly, both the terms can create a big conundrum for you if you don’t know the difference between them. But you no need to worry. We are here to help you know the difference between creditors and debtors.
I am sure you would like to learn about them, right. I ensure you that by the end of this article; you will have a profound knowledge about creditors and debtors. So without beating around the bush, let’s make a start with the basics first.
Definition of both the terms: Debtors and Creditors
Debtor – Who exactly is a debtor? In very simple words, a debtor is a person who owes money to another or third party. The party can vary; it could a single person or small business or a big business or government. Now suppose, you own money from any of these parties, you become their debtor as they have your debt. Basically, it is all about borrowing money from someone else.
There are two types of debtors that any business owner must be aware of (1) staff loans, and (2) trade debtors.
Creditor – On the other hand, is a person who lends or gives money to other person, and in return, he gets some kind of interest on the loan he gives. For example, you lend money to your friend, relative, or business partner for a particular period of time and get money back with some amount of interest. Specifically, creditor gives a loan or sells goods on credit.
Like debtors, there are also two types of creditors: (1) personal creditors such as family, friends, relatives, etc. and, (2) real creditors like banks and financial institutions.
Now that you have read the definition of both the terms, it’s time to dig in below to understand the major difference between these two terms.
Debtors vs. Creditors – A list of key differences
Before keeping your eyeballs on the given list of differences, all the differences are worth reading. Make sure you read all the given points thoroughly. Just have a look at them below.
1. Talking about debtor first, he is the person who takes or borrows money from someone. He has to pay the money back with some amount of interest. Whereas creditor is someone who lends money to a person, organization or firm.
2. Well, the term debtor originates from the Latin word ‘debere’ which means no owe whereas the term creditor drives from the Latin word ‘creditum’ which means to loan.
3. A debtor might receive a discount on the money he borrows but not always. Creditor, on the other hand, has right to offer discount to person or debtor he lends money.
4. Debtors fall under the accounts receivables category whereas creditors fall under the accounts payable category.
5. In the balance sheet, debtors are shown as asset until he pays off the loan. On contrary, creditors are shown as liability in the balance sheet.
6. Debtors basically have a debit balance to the firm while creditors have a credit balance to the firm.
When you should be a debtor and when to be a creditor?
The answer to this question would vary from person to person. As you have already gain much insight on debtors and creditors, now you can analyse yourself when you need be a debtor or creditor. Nevertheless, I believe as the market keep on altering due to fluctuation which takes place every day in the digital market or accounting firm, the need of creditors and debtors arise. As a businessman, you may or may not be facing financial problems, right. Suppose, as a business, you don’t have funds to run your business, now what will you do? Would you choose to wind up business or keep running it? If you continue want to run your business, you will need money which is only possible when you owes money to someone. Here you become a debtor.
On contrary, if your company is producing high ROI then you can lend money to someone; here you play a role of creditor.
To sum up
Let’s now conclude this article – I hope you are now fully aware of both the terms debtors and creditors. The terms shouldn’t confuse you anymore. Here you learned about the definition of debtors and creditors then the list of key differences as well as when you need to be a debtor or creditor. I am sure you’re smart enough to understand this. Additionally, if you want to avail accounting or bookkeeping services, then you can contact us.
Also, if any query if occurring in your mind related to this article or business finances, consult us and get in touch with us.