Our series of blogs around your frequently asked accounting and bookkeeping questions are part of our business guides and resources. They’re available to anyone who needs a bit of help getting to grips with accounting terms and practices, as well as providing more information about online accountancy services. In this article we’re talking about debtors and creditors, what these terms mean, and why they might appear in your bookkeeping.
What are debtors and creditors?
If you owe money to a person or business for goods or services they have provided, then they are a creditor. Looking at this from the other side, a person who owes money is a debtor.
Why are debtors on a balance sheet?
A customer invoice counts as income at the point it’s raised, even before it’s been paid, so you should still show them on your balance sheet. Your debtors, also known as receivables, represent those unpaid customer invoices, but they’re still considered to be income because the sale has been made.
It’s important a business also looks at debtors as an aged debtor report. This shows how much money is owed, and since when. This gives you an opportunity to follow up on the late payment, so you have a better chance of recovering the money from your customer.
If you’re unlikely to recover an old debt, it becomes ‘bad debt’ which may need to be written off. A business might have a very healthy looking income, but there can be problems making financial decisions based on income if it’s never actually going to be received.
Why should your business keep track of its creditors?
Recording creditors (also known as payables) in your bookkeeping will help your business keep track of how much money is owed against any income.
In accounting terms, creditors are a ‘liability‘. This is an amount you’re liable for, and must pay as the result of a previous agreement.
A creditor might show on the company’s balance sheet as a current liability (due for payment within a year), or a long term liability (due after a year or more). This can be useful for financial planning, so that income can be put aside for future liabilities.
What do creditors and debtors mean for cashflow?
Cashflow is, quite literally, the flow of cash through your business. Ideally a business always has the funds available to pay its debts, staff and suppliers on time. Things get awkward pretty quickly if this isn’t the case!
Keeping track of your debtors is essential for making sure you get paid correctly and on time. Likewise, getting this money into the business will help you pay your own creditors within their payment terms.
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