Creditor vs Debtor

Difference Between Creditors vs Debtors

Creditors and Debtors are part and parcel of every business. Purchasing and selling goods or services for credit changes the relationship between a seller and buyer to a Creditor vs Debtor. They help the business run on credit cycles, so a business doesn’t feel any liquidity pressure in its day to day activity. Any purchase made on credit will be added in creditors on the current liabilities side of the balance sheet while every sale made on credit will be added in Debtors to the current assets side on your balance sheet. Creditors vs Debtor are also important to determine a credit policy for the company as they plan for the company’s liquidity over a particular period.

What is a Creditor?

Oxford Dictionary defines a creditor as “A person or company to whom money is owing”. Simply put, Creditors are companies, organizations, or people to whom you owe money for any goods or services received or a loan taken. In business, we normally use the word creditor for any supplier who gives us goods or provides credit services. Let’s take an example: If Firm A buys goods worth ₹10,000 and promises to pay to Firm B after 90 days. The goods purchased will be called as purchased on credit for Firm A. While Firm B will be called a creditor in Firm A’s books of accounts, all dues to the firm are completed. Creditors affect ratios like the Current ratio and the Quick ratio as they form part of the current liabilities in the Balance Sheet.

What is Debtor?

Oxford Dictionary defines a debtor as “A person, country, or organization that owes money.” Simply put, Debtors are companies, organizations, or people who owe money to you for any goods or services provided or a loan given. In business, we normally use the word debtor for any customer to whom we sell goods or provide service on credit. Let’s take an example: If Firm A sells goods worth ₹10,000 and Firm B promises to pay after 90 days. The goods sold will be called as sold on credit for Firm A. While Firm B will be called a debtor in Firm A’s books of accounts, all dues to the firm are completed. Debtors affect the Current ratio as they form part of the current assets in the Balance Sheet.

Head to Head Comparison between Creditors vs Debtors (Infographics)

Below is the top 10 difference between Creditors vs Debtors

Key Differences Between Creditors vs Debtors

Both Creditors vs Debtor is a topmost and important position in the organization. Let us discuss some of the major differences :

• Creditors are people/entities to whom the company has an obligation to pay a certain sum of money. Debtors are people/entities who owe a sum of money to the company.
• Creditors are Account Payable and reside under current liabilities in the Balance Sheet. Debtors are Account Receivable and reside under current assets in the Balance Sheet.
• Non-payment of dues to creditors affects the working capital cycle positively but negatively affects Credit status. Non-receipt from the Debtors affects the working capital cycle positively but does not affect Credit status.
• As a credit, it is easier to dictate terms to the supplier on how much credit is required and the term thereof. As a debt, or it is comparatively difficult to dictate terms to a customer regarding the credit period and term thereof.
• Higher creditors harm the Working Capital and liquidity ratios. Higher Debtors have a positive impact on Working Capital and liquidity ratios.
• There is no requirement for the creation of the provision of creditors. Provision of Doubtful Debt is required to be created for Debtors according to the Accounting Policies.

Creditor vs Debtor Comparison Table

Let’s look at the topmost Comparison between Creditors vs Debtors.

Basis of Comparison	Creditors	Debtors
Meaning	A person who you owe money to in exchange of goods purchased or services received	A person who owes you money in exchange for goods sold or services rendered.
What is it?	It is an account payable.	It is an account receivable.
Place in Financial Statement	It is a Balance Sheet item on the liabilities side.	It is a Balance Sheet item on the Asset side.
Benefit	It helps the firm use the goods or services in advance to the actual payment date and thus enjoy a credit period before the actual payment.	It helps increase customers as normally the customers would prefer a credit purchase instead of cash.
Impact on Profit Margins	No impact on Profit Margins	No impact on Profit Margins
Impact on Cashflow	Positive impact on cash flow as the payment is made at a later date.	Negative impact on cash flow as the payment will be received at a later date.
Impact on Working Capital	High creditors will reduce working capital.	High creditors will increase working capital.
Impact on Liquidity Ratios	Yes, it will affect the current ratio and quick ratio.	Yes, it will affect the current ratio.
Provisions	No provisions to be made	Provisions of Doubtful Debts to be created as per Accounting Policies
Impact on Capital Structure	No impact on Capital Structure	No impact on Capital Structure

Conclusion

For operating any business Creditor vs Debtor are very important stakeholders as most businesses run on credit. A business needs to have a good liquidity position. Ratios like the Current Ratio and the Quick ratio measure the current liquidity situation is of the company. Creditor vs Debtor is an important part of the said, and they form an important part of the company’s liquidity position. A credit policy is made with specific reference to the credit period received/allowed and the amount received/given on credit so the company can plan properly in advance regarding its credit cycle. It is important to have a strong and robust credit policy in place, so the business does not get working capital stress.

Thus, Creditor vs Debtor is important for every business as they play a huge part in running the business and its liquidity situation.

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