The 5 Differences Between Debtor and Creditor
When it comes to the accounting of your business, you must familiarize yourself with the terms used, such as debtors and creditors. These terms are the most straightforward and easy to remember yet are also the most tricky ones.
So, to help you get better at your accounting, here are the key differences you might want to note regarding these terms.
Many people sometimes get confused about who is a debtor and a creditor. The first difference you should know is the meaning of the name itself.
Debtors are organizations or people who borrow money from an individual or institution. They are liable for giving back the money they borrow in a specific term imposed by the creditors.
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On the other hand, the creditors are the institution or person who lends money to the debtor. They are also the ones who offer credits to other entities.
The provision for questionable debts is the projected amount of negative debt that results from issued but uncollected accounts receivable.
According to the accounting policy, there is a provision for debtors, whereas there is none for the creditors.
Debtors are considered assets to the company, while creditors are known as liabilities. The debtor receives the benefit without providing money or money's worth. They will be treated as an asset until they pay the amount borrowed.
The creditor usually shows up as a short-term loan, salaries payable, expense payable, mortgage loans, or long-term bonds. Remember that the debtors are account receivable while the creditor is an account payable.
The debtors are granted discounts, and creditors are the ones who provide discounts to debtors to whom they extend credit.
The last difference you must know between the debtor and creditor is the receipt of payment. The debtor will make the payments for the amounts owed, and the creditor is the one who will receive the payments.
Debtor and creditor fall under a separate provision of the law. Some issues regarding the debtor, such as a minor billing problem, are commonly handled in small claim courts.
However, an attorney will come into the picture in more extensive and complicated disputes. Most of the time, the lawyer you hire for any such case will only charge you a fee when you win the case.
Creditors, also referred to as the business, will commonly have a lawyer specializing in this field to help them collect payments, extend credit, and better understand the law and regulations governing lending. Take into example the Fair Debt Collection Practices Act. This law and regulation aim to protect both debtors and creditors.
On the other hand, small businesses usually employ general attorneys to cover a wide range of legal issues, including credit and debt issues.
We often come across such scenarios where we find the debtor coexisting with the creditor. Below is an example where you can find the two coexist.
One scenario is when you use a credit card provided by the creditor to purchase groceries. You can sign a contract with a bank for a credit card to use, especially if you’re currently struggling or building your credit score.
At this point, you become the debtor, and the bank becomes the creditor. After signing for a credit card and getting approved, you can spend the money lent to you to meet your necessities. However, even though you have money to spend now, choose to spend on what’s necessary. Avoid purchasing items that you don’t need.
So without the creditor, the debtor will not be able to purchase groceries with just the money they have on hand. Meanwhile, the bank will not thrive in the absence of debtors who will acquire their services and pay for the interests of these services.
When you’re new to borrowing, it can be difficult to find your way through its many jargons, as well as the role each party plays in the process. But with the differentiation and the examples provided in this article, you can better understand each term's role. This way, you won’t have to fumble over the ins and outs of the lending industry.