Our ‘commonly asked accountancy questions’ blog series aims to help our audience understand tricky accounting terms or practices. This time, we’re focusing on creditors and debtors.
What is a creditor?
A creditor is a term used in accounting to describe an entity (can either be a person, organisation or a government body) that is owed money, as they have provided goods or services to another entity. Sometimes, this entity will charge interest on money borrowed as a way to make money. This could be interest on bank loan repayments or credit card payments.
Examples of creditors:
- Trade creditors – money you owe to suppliers
- Loan from a bank or entity
What is a debtor?
A debtor is a term used in accounting to describe the opposite of a creditor — an individual that owes money, or who is in debt to an organisation or person. For example, a debtor is somebody who has taken out a loan at a bank for a new car.
Examples of debtors:
- Trade debtors – money owed from customers
- Staff loans
Creditor and debtor scenario
One typical scenario of a creditor and debtor in everyday life, would be a credit card company (creditor) who has issued a credit card to a customer (debtor) once they have signed a legal contract. This will outline the interest the debtor will pay on the outstanding balance, and the spending limit that has been allocated to them (which is determined by personal circumstances).
When that card user (debtor) spends money on that credit card, they are now essentially borrowing money from the credit card company (creditor) to pay for services or goods. For this scenario the credit card company charge 5% interest on each loan, meaning the debtor would pay 5% interest on the outstanding balance until it’s cleared.
If you would like to learn more about bookkeeping and how Clear Books can make doing your books simple and stress-free, then sign up to our ‘Introduction to bookkeeping and Clear Books workshop’ held in our London office.