Updated: Nov 15, 2021
Debtor and Creditor are common terms when it comes to bookkeeping. Although these two terms might seem straightforward, it's important to make clear the difference between the two and how both need to be accounted for in your financial records.
Simply put, a debtor is a person or a legal body (such as a company, organization, or government) who owes money to another party. For a business, the amount to be provided is usually a result of a loan provided, goods sold on credit, etc.
On the other hand, a person or a legal body to whom money is owed is known as a creditor. The amount to be paid may arise due to repayment of a loan, goods purchased on credit, etc.
Let’s go deeper into the difference between debtor and creditor.
What is a creditor?
Businesses are likely to deal with two different types of creditors: loans and trade creditors. In a business scenario, the most common loans come from a bank or financial institution that has lent money to a business, whereas trade creditors are essentially suppliers that haven't yet been paid for the goods or services they supplied. Trade creditors are also known as accounts payable.
As a construction firm, it’s very crucial to keep track of your creditors for several reasons. Firstly, it’s essential to know how much your business owes, and when payments are due to be made. By managing effectively your creditors, you will be sure that your business will have enough money in the bank to cover payments when they are due.
What is a debtor?
Like creditors, debtors also are categorized into loans and trade debtors. However, trade debtors are more common in a business because most companies will not issue loans.
Trade debtors are customers that owe money to your business. For example, when you sell goods or deliver services to a client and may not make payment immediately, the amount the customer owes becomes part of your trade debtors. These trade debtors are also known as accounts receivable.
When you're busy growing your business, it can be easy to neglect to manage your debtors, but good debtor management is crucial to ensure your business has enough working capital to reinvest and grow. You should have proper processes in place that will result in faster payments. fewer bad debts, and healthier cash flow.