Understanding Accountancy Terms: Debtors and Creditors
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In this article, we'll talk about debtors and creditors, what they mean, and why they might show up on your accounting.
What are Debtors and Creditors?
If you owe money to a person or company for the goods or services they provide, they are creditors. Seen from the other side, a person who owes the money is a debtor.
Why are Debtors On A Balance Sheet?
A customer invoice counts as sales at the time of collection, even before it is paid, so you still need to include it in your balance. Your accounts receivable, also known as accounts receivable, represent these unpaid customer invoices, but they still count as sales because the sale has taken place.
But! It is important that a company also treats debtors as aged debtor informants. This shows how much money has been owed since then.
When a previous debt is unlikely to be recovered, it becomes "bad debt" that may need to be written off. A business can have a very healthy income, but there may be problems making financial decisions based on that income if it is not actually raised.
Why Should Your Business Watch Your Creditors?
Keeping creditors (also called liabilities) on your books will help your business keep track of the number of pecuniary claims against income.
In accounting terms, creditors are a "liability." This is an amount that you are responsible for and must pay based on prior agreement.
A creditor can appear on the company's balance sheet as a short-term liability (to be paid within a year) or as a long-term liability (to be paid after a year or more). This can be useful for financial planning to reserve income for future liabilities.
What Do Creditors And Debtors Mean For Cash Flow?
Cash flow is literally the flow of money through your business. Ideally, a business will always have the means to pay its debts, employees, and suppliers on time. If not, it gets embarrassing pretty quickly!
To get paid on time and correctly, it is important to keep track of your debtors. Similarly, if you invest this money in the business, you can pay your own creditors within their payment terms.
Find out more about "ProTax Accountant" to help you keep track of your business finances. Or, to speak to one of the teams about our online accounting services, call 02085718826 or request an instant quote online.