What Is a Creditor?

Under accounting terms, Creditors are a source of getting a loan in many ways such as in the form of money, credit card, goods or services, bonds, or shares. They act as a financial service provider who can be as an individual (family or friends), organization (other corporate or Public company), government (Bank or other financial institutions). These financial providers allow debtors to take a time to repay the borrowed money, but repaid time should be mentioned on the legal contract which conducts for the confirmation and permission to utilize their capital and promise to return the money with interest according to a given fixed period in the contract.

In the UK, real creditors who belong to any financial institution (have the proper authority to offer money to debtors) build a contract under Individual Voluntary Arrangement (IVA) after submission of acceptance notice.

On the other hand, Company’s creditors are applied to the court then the court makes a contract between both parties in the form of a promissory note so that both of them follow the given rules and policies. 

Who Is The Creditor?

Creditors are financial providers who have the authority to provide their service to the needed people and organization (debtors) so that they can get paid by the debtors after finishing the repaid period with interest along with repayment of borrowed capital.

  • They are expected only when the repaid time is over.
  • They can’t take any legal action against debtors or cannot adopt their collateral security as a permanent asset before the repayment time is over.
  • They can be anyone such as banks, family or friends, finance companies, vendors, and others.
  • They provide money-based trust, loyalty, experience, financial company’s health, income source, financial background, and security.
  • They can be of many types and every creditor has a different motive to offer services to the debtors.

On What Basis Creditors Provide Their Service To The Debtors

This is the actual question that is asked by many of the debtors. So it’s easy to illustrate on what basis creditors provide their services to the debtors. Let us explain in brief,

As we said above, they can be of many types and each has a different motive to provide service. First, we will know how many kinds of creditors there can be.

To Perform as a creditor is not a tough task but you should have a different kind of plans of services in the form of money, products or goods, and other for the debtors so that debtors can interact with you. We all know creditors have a specific position in the finance industry and organization whether it is small or big, due to financial status. 

Creditors provide their services to the debtors based on:

Collateral security 

Many creditors provide services based on a collateral security such as debtors issue money from the creditors as collateral security such as home, cars, land, vehicles so that if debtors won’t be able to repay the money in the future for any reason, creditors will recover money by selling security which had given by debtors as collateral. Such creditors can be banks or other financial institutions, or other vendors.

Based On Interest

Creditors charge debtors in the form of interest after offering a principal amount. At the time of offering the loan amount, they make a contract for the future as a promissory note so that debtors can’t deny and refuse to repay the principal amount with interest. They have a right to decide the interest rate according to the laws of interest. Such as banks.

On the other hand, some creditors charge interest according to their own rules so that they can earn a good income by offering money as a loan to the debtors (individual, organization, banks).

Yes, Banks can become debtors in the case of when people want to secure their money so that they can earn a fixed amount by charging interest according to the bank rule of laws. They get paid monthly, quarterly, or annually.

Some investors can be creditors due to providing money for investment purposes in other companies and get paid by interest. These investors can be permanent as shareholders by permanent investing for the company in exchange for the ownership of part of the company’s shares, those investors are known as shareholders of the company. Those shareholders have the authority to make financial decisions regarding the company.

On the basis of trust

Creditors who provide money to the debtors on the basis of trust. Those types of creditors are family or friends, and relatives, no other creditors can offer money as a loan without charging any interest, and other expectations such as after due date charge, they can charge penalty fees.

What Are Creditors In Accounting?

Creditors are the same whether it is counted in accounting or outside the accounting. When an accountant represents the accounting presentation through financial statements such as Income and expense statement, Profit and loss statement, Balance Sheet. They are also represented by these financial statements so that company can understand creditors get paid during the year or get paid after the year.

Creditors in Income and Expense Statement

All expenses which are recorded on the right side of the expense column, are counted as creditors that haven’t paid yet. And after that, all the expense transactions are transferred into the balance sheet for the final statement. 

Creditors in Balance Sheet

Every business needs to prepare a balance sheet to show the final structure of the business. Debtors and Creditors are performing the main role in the accounting process so that business transactions are always moving with their goods or services. 

From the side of Creditors

Creditors are responsible for the credit sales and those credit sales are recorded as creditors under accounts receivable of the balance sheet. It represents the company’s assets that haven’t been received yet, it is considered as an outstanding balance in the business for each transaction. Creditors in accounting are those who sell goods or services to the customer without receiving any single amount (credit sales), it counts as an asset.

From the side of debtors

On the balance sheet of debtors, Debtors are responsible for the credit purchase and liabilities are recorded as creditors under accounts payable. It represents the company’s liabilities that debtors haven’t paid yet. It is considered as an outstanding payable in the business. Debtors are those who buy goods or services from vendors without paying any single amount (credit purchase), it counts as liabilities.

What Are The Types Of Creditors?

Creditors can be anyone but they need to provide money to the needed people (individual, organization). At the time of offering the money, they check the details of the borrowers and take out assets as collateral security. They want to know more information regarding such as:

  • Why they should need money as a loan.
  • In what purpose they want to invest money
  • How much they applied for the loan
  • What security they will put against the loan.
  • Also, take out all the bank statements for checking the business transaction turnover.
  • Before providing a loan, they verify the borrower’s background so that they are assured that they are offering money to the right person.

Mainly creditors are of three types:

Secured

These creditor do not affect by bankruptcy due to having a borrower’s assets as collateral security. Before offering a loan, they make a promissory note or legal contract in which all the required things are mentioned such as security, period, percentage of interest charged on a loan. That’s why these creditors are secured.

Unsecured 

Unsecured Creditors have no security provided by borrowers such as credit card loan providers. In this case, borrowers can’t give a guarantee for the repayment. That’s why we can call them unsecured.

Preferred

A Preferred Creditor is the one who receives a dividend in bankruptcy in the form of claims such as employee wages, travel expenses, court order support agreements.

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