Definition of Debtor
A Debtor is someone who owes money. A debtor can be an individual, a company or any organization. Basically, debtor is an accounting term used to refer 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.
There are two parties in any transaction; one is buyer and another seller. So, at some point of time one will be debtor and another creditor. The entity or individual who owes money is debtor and the entity or individual to whom money is owed is a creditor.
In different scenarios, we have different terms for debtor. Like, in case of bank loan, the party getting the loan is called as borrower (Debtor). In case of issue of securities, the person lending the money is called as issuer. In accounting, the debtors are an account receivable of the company. Debtors have 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 bank’s credit card to buy anything, we become debtor 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 the debt is due after one year comes under long term debtor. These are recorded under long term receivables under the head 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 the debtors. One can quickly check the overdue invoices and send reminders to the debtors. Another feature is that you can add late fee to the 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 creditor 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 since a long period of time
- The debtor is no more creditworthy
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
Following are the difference between debtors and 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 credit balance|
|Asset/Liability||Debtors are an 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 the 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 debtor for the business. Hence, debtors can help increase sales.
- Surviving Competition: In present times, when most of the 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 customer, it shows them the company trusts its customers. This will motivate them to be loyal to the company.
Disadvantages of Debtor
Here are the few disadvantages of having debtors in the business:
- Impact of Cash Flow: Having huge debt balances have a negative impact on the cash flows of the company as large amount is blocked with 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 the large amount is blocked with the debtors, then the business will be left with no or little money required for the growth of the business.
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.
This is a guide to Debtor. Here we also discuss the definition and types of debtors along with advantages and disadvantages. You may also have a look at the following articles to learn more –