Updated July 17, 2023
Definition of Debtor
A Debtor is someone who owes money. A debtor can be an individual, a company, or any organization. Basically, the debtor is an accounting term used to refer to the entity or an individual who owes money to another entity or an individual. another entity is called a creditor.
Suppose Mr. A buys goods worth $5,000 from Mr. B on credit. Here, Mr. A owes a debt of $5,000 to Mr. B. So, Mr. A becomes a Debtor in the books of Mr. B.
Explanation
There are two parties in any transaction; one is a buyer and the seller. So, at some point in time, one will be a debtor and another creditor. The entity or individual who owes the money is a debtor, and the entity or individual to whom money is owed is a creditor.
In different scenarios, we have different terms for debtors. Like, in the case of a bank loan, the party getting the loan is called the borrower (Debtor). In the case of an issue of securities, the person lending the money is called an issuer. In accounting, the debtors are an account receivable of the company. Debtors have a debit balance. It is reported under the head assets of the company in the balance sheet.
Example of Debtor
There are various examples of debtors like;
- Trade Debtors: When a supplier sells goods to the customer on credit terms, the supplier will report it under trade debtors.
- Credit Card Issued by Bank: When we use a bank’s credit card to buy anything, we become debtors of the bank.
Types of Debtor
There are two types of debtors classified according to the duration of the debt owned; Short term Debtors and Long term Debtors.
- Short-Term Debtor: These are those debtors under which the debt is due within a year. These are recorded under Short term receivable under the head Current Assetsin Balance sheet.
- Long-Term Debtor: Those debtors where debt is due after one year comes under long-term debtor. These are recorded under long-term receivables under the head of long-term assets in the Balance sheet.
Debtors and Debitoor
Debitoor is online accounting software to create and manage debtors. It is mainly used by freelancers, small businesses, and traders.
It is easy to use accounting software. It provides the following services:
- Creating invoices
- Managing debtors, like sending reminders for payment
- Recording expenses
- Managing customer data
This software contains so many features in order to manage debtors. One can quickly check the overdue invoices and send reminders to the debtors. Another feature is that you can add a late fee to overdue invoices. The software will calculate the late fees automatically and show the total due balance.
Debtor in Bankruptcy
The bankruptcy of the debtor is one of the major concerns of creditors as it becomes difficult to recover the unpaid debt in such a situation.
There are three conditions to be fulfilled in order to declare bankrupt by the debtor:
- He is still running his business
- He has stopped clearing his debts for a long period of time
- The debtor is no more creditworthy
The bankruptcy of the debtor does not mean that creditor won’t get its dues paid back, but in that case, an official person appointed by the court will decide how the payments will be cleared.
Debtor vs Creditor
The following are the difference between debtors and creditors:
|
Basis |
Debtors |
Creditors |
| Meaning | The person or entity who owes the money | The person or entity to whom money is owed |
| Debit/Credit Balance | Debtors have a debit balance | Creditors have a credit balance |
| Asset/Liability | Debtors are assets of the company | Creditors are the liabilities of the company |
| Payable/Receivable | It is an Accounts Receivable | It is an Account Payable |
| Creating Provisions | Provision for doubtful debts has to be created | No such provision created |
Advantages of Debtor
Here are a few advantages of having debtors in the business:
- Increase in Sales: Customers would like to buy goods on credit as it will not result in bulk cash outflows. Selling goods on credit creates a debtor for the business. Hence, debtors can help increase sales.
- Surviving Competition: In present times, when most businesses are offering their goods/services on credit, it becomes important to follow the trend in order to survive the competition.
- Loyalty: When you sell goods on credit to customers, it shows them the company trusts its customers. This will motivate them to be loyal to the company.
Disadvantages of Debtor
Here are a few disadvantages of having debtors in the business:
- Impact of Cash Flow: Having huge debt balances has a negative impact on the cash flows of the company as a large amount is blocked by the debtors.
- Increased Risk: Higher debt means a higher risk of default. The debtors have to be managed carefully to reduce the risk of bad debt.
- Impact on Growth of the Business: If a large amount is blocked by the debtors, then the business will be left with no or little money required for the growth of the business.
Conclusion
In any business transaction involving credit, there are two parties, debtors and creditors. It is important for the business to manage its debtors and creditors well, as it has a huge impact on its working capital.
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