What are the Responsibilities of Debtors?

The person who borrows money is a debtor. A creditor is the exact opposite of a debtor wherein they lend money. When any business gives its customer’s credit period or invoices goods or any services later, say, 20 days or 60 days, etc., the person to whom the business had sold goods would be recorded as debtor in the books of the business. For example, we take loans and borrow money to buy a house or a car, education, etc. When the money given by the individual or the organisation to a debtor becomes uncollectible or is outstanding in the books of business, they are called bad debts. Debtors are a crucial part of any business as they keep the accounts and cash flows of the business up to date. They also provide an overview of all the outstanding payments by the clients or customers. A debtor also helps in projecting future cash flows of the businesses. 

So, let’s know more about the functions of a debtor and the different types of debtors.

Did you know? Not all debts are bad. Debts can help you pay the mortgage for your home or education and help you build good credit with loans!

What are debtors?

The individual or association that has the liability to return the money to the individual or organisation which has taken the loan is known as the debtor. The debtor has a debit balance to the firm, and the instalments or the sum owed is received from them. Debtors or the account holders are recorded as assets under the ‘current asset‘ section in the balance sheet. Debtors are also called accounts receivable. The term ‘debtor‘ originated from Latin ‘debate’, which means no one. Discount is permitted to the debtors by the individual who broadens credit. Do you want to know more about the debtor, what a debtor does and how a debtor works? Read on to find out!

A debtor is a person or an organisation who owes money. It is a legal association that owes money from another association. This establishment could be a government, a person, a company, or any other legal establishment. The co-partner is known as a creditor. When the co-partner of debt composition is a bank, then the bank would be referred to as a borrower. If the counterpart is in shares and securities, it would be referred to as an issuer. 

Also read: What is Deferred Compensation and How Does it Work?

If a debtor can’t repay their debts, they are not liable to jail. There could be other fines and penalties if a debtor cannot repay their debt. They may get a low credit score by not repaying their debt. The debtor is not just a customer of goods or services. A person who borrows money from a bank or lender is also called a debtor in accounting. Debtors are fundamental to how every business monetary framework works. They impact how much cash flows in and out of an organisation and the speed at which it shows up. There are two primary kinds of debtors for all entrepreneurs to know about:

• Loans

An organisation that takes out a bank loan will turn into a debt holder to that bank. For instance, assuming a progressive organisation consents to get ₹ 10,00,000 to help with setting up another office, they’ll get that cash as a single amount. Until it’s repaid, they’ll continue to be a debtor to the bank over a pre-concurred timeframe and with premiums.

Also, a colleague can be a debt holder to your organisation, assuming you consent to give them a staff loan. It is a credit given to a worker by a business at a special rate that beats those presented by banks.

• Trade debtors

A trade debtor is a client or customer who hasn’t yet paid you for your goods and service, and they will continue to be a debtor until the receipt is paid.

How do debtors work?

In everyday business tasks, debtors and creditors work in a closely connected way. The relationship they share is similar to that of a buyer and seller, dealing in goods and services on credit and paying instalments on time.

The sum owed to a business will vary close by the sum it owes, influencing the assets and liabilities on your accounting report.

Clients who don’t pay for items or administrations upfront are debtors to your business. 

A debtor in accounting terms means a person who is the opposite of a creditor. A debtor is someone that owes or has owed money to another entity. For example, a debtor is a person that has taken out a loan to buy a new car.

Also read: Learn About Bookkeeping: Definition, Types & Importance

Trade debtors

The majority of the business dealings in today’s markets perform transactions on a credit basis, thus the customers who buy goods or services on credit are debtors for the business. A business may have several debtors.

The credit period is the interval from when credit is first extended until the last payment is made. The normal credit period may range from one month to three months and vary from sell co-partners. The credit period is necessary for businesses as a tremendous amount of trade is made every day. Thus debtors are the backbone of the business. Debtors also include many small retail traders who fulfil our daily needs present in every street. The credit mechanism of the market greatly benefits these small traders. They need not pay in advance for the goods because first, they have to set up their business to repay the debt. The credit period highly benefits many traders around the globe. 

Every industry, be it a small-scale or a large-scale industry, has benefited from this credit system. Debtors are the pillars of a growing economy like India. Usually, debtors are charged interest for availing of such a credit facility. They can be a source of income for businesses such as banks and financial institutions where interest is a major source of revenue. Lending loans to debtors is one of the major business activities of banks and other financial institutions.

Example of a debtor

Organisations can also credit cash to different organisations or people, and it makes the organisation the moneylender and the other element the borrower. The most well-known type of organisational credit is store credit, and each significant retailer has its store card. Let’s assume you purchase a shirt on your Shoppers Stop store card. You get the money for that purchase from Shoppers Stop, and they would record this exchange in its accounts receivable until you pay for the shirt in cash.

Other debtor examples are as follows:

Consumer loans: Taking loans from financial institutions for educational purposes, to buy a house, for a trip abroad, etc.

Government loan: To raise public funds and enhance development activities, the government issues T bonds.

Organisations: Many organisations, like non-profit organisations, take loans for various purposes.

Credit facility: Many suppliers offer credit goods to businesses with good creditworthiness and reputation. Many credit facilities like prepaid taxis, prepaid recharge, credit cards, etc.

Business loans: Many businesses take short-term and long-term loans to meet daily expenses or expenses related to operations. Examples of long-term loans include securities like debentures, shares, bonds. Examples of short-term loans include a letter of credit, bills of exchange, etc.

What does the term Sundry Debtors mean?

“Debtor” refers to an individual or group that borrows your business money for goods or services sold on credit. Such a group of individuals or organisations is called sundry debtors, and they are also sometimes called accounts receivable or trade receivables.

The various meanings of sundry are “different” or “some”, and it refers to many similar items grouped under one head called sundry in the business world. Usually, various debtors arise from core business activities such as selling goods and services, and the company treats them as assets.

Such accounts receivables emerge because of credit deals which are revenue in nature. Nevertheless, when the cash is expected to be received, it becomes an asset for the association. 

Following is the journal entry for sundry debtors that you should record to show credit sales of goods or services.

Also read: Know about Balance Sheet – Definition & Examples

Journal entry when payment is received from debtors

For example, Maya purchases some stationery items from a stationery shop on credit. Thus, Maya would be recorded as a debtor in the books of a stationery shop (current asset). Similarly, such a group of debtors is known as sundry debtors from the viewpoint of the stationery shop.

Treatment of sundry debtors in the trial balance

Trial balance (Extract)

Debtors Account

A debtors account is an account where we keep all the records of the debtors who borrow goods and services from us and then pay the amount after a certain period. We maintain the debtor’s account to track records of all credit sales in a business during a particular period. A debtor account is a representative personal account. We call it a personal account because we cannot write all the names of the persons in the balance sheet to whom we owe money. Thus, we use this term to represent all personal accounts. 

When we do any credit sales, debtor account gets debited, the sales account gets credited. And in the case of return of sales, the sales return account is debited, and the debtor’s account gets credited. It appears as an asset in the balance sheet. A debtor is somebody who owes you cash regularly because you have invoiced them for goods and services provided. The receipt gives information about what they owe and why. The whole process of debtor management is known as accounts receivable.

Debtor A/C

Also read: Learn About Safety Stocks

Conclusion

“Debtor” is the most common word used in accounting. The reason why sundry debtors are recorded as an asset for an organisation is that the money given to the debtor is the organisation’s property, which it expects to get within a short time. According to an investor’s point of view, it would assist with investigating the speed at which an organisation can gather cash from its debt holder. Debtors also help in projecting future cash flows of the business and also help in keeping the books of accounts of the businesses accurate.

Follow Legal Tree for the latest blogs, and articles related to accounting, GST, income tax and business tips.