Sundry Debtors and Sundry Creditors are the stakeholders of the company. For an efficient Working Capital cycle, every company maintains a time lag between the receipt from debtors and payment to creditors. Creditors are the parties, to whom the company owes a debt. Here, the party can be an individual or a company which includes suppliers, lenders, government, service providers, etc.
The primary difference between a debtor and a creditor is that both terms refer to two parties involved in a lending transaction. The company’s debtors are listed as assets on the balance sheet, whereas the company’s creditors are listed as liabilities. The world of finance and business is filled with a variety of terms that can often be confusing.
Where are bad and doubtful debts recorded?
A company, for example, may borrow capital to grow its operations (i.e., become a debtor), while also selling its goods to customers on credit (i.e., be a creditor). The word creditor is derived from the Latin word “credit,” which means “to loan.” A creditor or lender is a party to whom money is owed. A creditor can be an individual, organisation, company, or government. The first party, in general, has provided some service or property to the second party under the assumption and trust of getting back the amount that has been lent. Thus, the difference between gain and profit is that gain is the economic benefit earned from activities outside of usual business, while profit is earned from the usual business activities. Summarising account information to study the financial position of a business.
Since businesses give credit to their consumers and pay their suppliers on delayed payment terms, nearly every business is both a creditor and a debtor. The only time a company or individual is neither a creditor nor a debtor is when all transactions are paid in cash. In the normal course of business, goods are bought and sold on credit, which is not a new thing. Selling and purchasing of goods on credit change the relationship between buyer and seller into debtor and creditor. Debtors are the one, to whom goods have been sold on credit, whereas Creditors are the parties who sold the goods on credit. They both are relevant for an effective working capital management of the company.
It is, therefore, difficult to follow one single accounting policy for recording a transaction or an event. To uphold the quality of comparability, it is necessary to disclose the accounting policies followed in relation to all important elements of financial statements. In case the enterprise switch over from one policy to another, the effect of such change should be quantified and disclosed. Ans.The 2 objectives of accounting are – Maintaining a systematic record of all financial transactions and preparing financial reports to access the financial position of the business organisation. The creditor typically requires collateral and/or a personal guarantee from the debtor, as well as loan covenants.
Popular Questions of Class 11 Accountancy
On the contrary, a creditor represents trade payables and is a part of the current liability. A creditor is a person or entity to whom the company owes money on account of goods or services received. He discussed the details of memorandum, Journal, ledger and specialised accounting practice.
Class 11 Accountancy – Chapter Introduction to Accounting NCERT Solutions Distinguish between debtors and creditor
- They come under the asset category in the balance sheet of the company.
- Charlie Company is the creditor and Alpha Company is the debtor if Charlie Company sells items to Alpha Company on credit.
- A company, for example, may borrow capital to grow its operations (i.e., become a debtor), while also selling its goods to customers on credit (i.e., be a creditor).
- As a result, the company’s liquidity does not degrade, and the risk of default does not rise.
X becomes our debtors and it means that the stock has been converted into Debtors. Again, if a bill receivable from X, it means that the bills are converted into ‘Bills Receivable’ and after some time Bills Receivable will be converted into cash. It shows that all Current assets are finally converted into Cash. Depends upon the size and nature of business and type of transactions.
The Impact of Debtors and Creditors on Cash Flow
In general, debtors are the parties who owes debt towards the company. The parties can be an individual or a company or bank or government agency, etc. Whenever an entity sells its goods on credit to a person (buyer) or renders services to a person (receiver of services), then that person is considered as Debtor and the company is known as a creditor.
In the case of Businesses when the credit sale incurs the customer shall become the debtor. Current Assets− Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day-to-day business activities; for example, cash, debtors, stock, etc.
They represent loss or expense that is written off over a period of time, for example, if advertisement expenditure is Rs 1,00,000 for 5 years, then each year Rs 2,00,000 will be written off. Out of the above assets, Stock and Investments are shown in the balance sheet at Cost or Market price whichever is less. Bills Receivable and Debtors are shown at the estimated realisable .
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- The creditor is extending a modest amount of credit to a debtor for a short period of time, so the size of the credit line granted and payment terms are more important to the creditor than the requirement for collateral or personal guarantees.
- In most cases, a debtor can start the bankruptcy procedure by filing a petition with the court.
- The Income Statement, which is a record of the revenues and expenditures; and The Cash Flow statement, which is the summary of the cash and cash equivalents flowing in and out of the business organisation.
- A part of the’machinery, which cost Rs. 40,000 was sold for Rs. 45,000.
Therefore, the intangible assets help the firm in earning profits as much as the tangible assets. In this account, the revenues resulting from the transactions of the period and the consequent expenses incurred are recorded. A comparison of the period and the consequent expenses incurred are recorded. Mr. Sunrise started a business for buying and selling of stationery “ with Rs. 5,00,000 as an initial investment.
More Questions From Class 11 Accountancy – Chapter Introduction to Accounting
If you’ve ever asked yourself, “What is the difference between debtors and creditors?” then you’re in the right place. This article is dedicated to dissecting the crucial elements that distinguish these two roles, by providing an extremely informative and elaborate understanding of the concept. This article will expound on the 10 key differences between debtors and creditors, who debtors are, who creditors are, and how these roles intertwine in the grand scheme of financial interactions. Once the financial transactions are recorded in journal or subsidiary books, all the financial transactions are classified by grouping the transactions of one nature at one place in a separate account. Accounting measurement and treatment of any transaction depends, to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal frame work.
Investors may also decide on its basis whether or not they should keep their money invested in the firm. Shareholders can make an estimate of the efficiency, success, etc., of the management and may decide accordingly whether to invest or not in the business. Ans.The 3 most essential distinguish between debtors and creditors class 11 accounting fundamentals are assets, liabilities, and capital. When Alpha Company lends money to Charlie Company, Alpha becomes the creditor, while Charlie becomes the debtor.
This can be in the form of trade accounts payable or loans payable. An entity that provides credit is in the business of selling goods or services, with credit extension serving as an afterthought. To remain competitive in the marketplace, it may be important to extend credit. Debt can be referred to in a variety of ways depending on the sort of endeavour.