What is a Debtor?

A debtor is a member of financial accounting that continues the flow of transaction of account payable. He/She runs the turnover of the company’s liabilities so that he/she can remember to pay the entire money which has been taken from the creditors such as banks or other financial statements, vendors.

Who is the Debtor?

A debtor is the one who receives the money from creditors to meet its business and personal requirements. A debtor can be anyone such as an individual, organization who takes support from the creditors in the form of a loan and after taking the loan he/she needs to repay the loan with interest charges. A debtor is considered as a borrower and issuer who can take over the required capital from loan providers, whenever he/she wants. Debtor and Creditor have the burden to run the whole organization’s financial activities by using strategies. 

  • A debtor is a client who runs the company’s flow of goods or services to take the confirmation of paying money later.
  • A debtor has a strong interaction with creditors for receiving the stock and agreement for liabilities.
  • A debtor can be the owner of an organization, whole organization, an individual (personal needs of outside the company).
  • Debtors cannot be anyone, they are the only ones who give the confirmation (in the form of a promissory note) to repay the amount of loan that has been taken for some time.

Responsibilities of the Debtor

  • A debtor has a responsibility to pay debts on a fixed date that has been confirmed in the promissory note.
  • He/She is referred to as a customer for a creditor (supplier or vendors), borrower for a creditor(banks or other financial institutions).
  • He/She submits the security against the loan to the creditors at the time of taking a loan.
  • He/She must build a promissory note for the confirmation date of repayment of borrowed money with interest charges.
  • He/She needs to fill installments when he/she takes a loan from any banks or other financial institutions.
  • If he/she wants to take a time for repayment process so he/she needs to make a contract in which all the terms and conditions are mentioned such as discount, time of repayment loan capital, percentage of interest on capital.
  • He/She must define each business statement to the creditors to borrow the huge capital so they can satisfy with his/her business reality.
  • He/She has a responsibility to maintain account payables due to required by the auditor at the time of auditing in the future.
  • He/She must repay the amount of loan before the due date, otherwise will have to bear many kinds of penalties which affect the negative impact on business financial growth and or may break the transaction flow.

Debtors in Accounting

Under the accounting system, debtors play a crucial role to define the accounts payable section. A debtor is referred to as an issuer and sometimes a borrower in different situations. The situation clearly defines the roles of debtors so that business can understand their actions. With the accounting software, accountants keep track of the debtors from the debtor’s account and track all the assets which has taken by the debtors from suppliers.

In basic terms of business, the debtor is a client for the supplier/bank/vendor who wants his/her service in the form of goods, money for running the whole running business. Without creditors and debtors, a business cannot run. If an organization never becomes a debtor or never becomes a creditor so they can’t get huge success due to fuseness in the business.

Debtors as an issuer

When the person buys goods or services, bonds for flowing the transaction of business without obstacles and promise to pay the money of such things on a future date fixed with the supplier, known as debtors as an issuer. The Issuer can’t be the same as the borrower due to many differences such as the borrower’s need to pay the interest along with repayment capital on the basis of making a promissory note which is required by both parties. Even, submit any security to the creditors against the loan as collateral such as a vehicle, house (in case of the mortgage loan).

Debtor as a borrower

When the person borrows the capital for business investment, business activities, and other personal requirements from creditors (banks or other financial institutions, financial loan provider agency, credit card providers) in the form of a loan, known as a borrower. The borrower first steps to give the surety about business health by showing financial statement records so that they can carry out a good amount and then fills the legal formalities such as promissory note or contract in which basic requirements are mentioned such as:

  • Name of the borrower (who takes the loan) and the institution (who offers the loan) 
  • The purpose of a loan
  • Time of repayment of a loan with interest.
  • Date of taking a loan
  • Signature of loan
  • Amount of loan

A Debtor in Balance Sheet

Under the balance sheet, Sundry debtors are the customers of their vendors or suppliers, they are the ones who are recorded as a sundry debtor under assets and also recorded as a creditor under liabilities section. Without credit dealings, no one business can run to meet their higher needs due to higher competition in the market. So an accountant has to pass out an entry by the name of account payables under liabilities so that the owner can understand what they have left to pay. It’s a very difficiult task to get money on credit from customers at the same time, it takes time due to lengthy legal procedures. At the end of the year, if debtors can’t pay their liabilities and fear creditors, quick action such as legal action like file against debtors, so they can go through with the bankruptcy.

How to calculate debts?

When business owners want to track their debts at the end of the year, they directly check out the balance sheet, which includes the total debts or liabilities of the business. Let’s take a look at how to calculate debts,

All the liabilities of the company are considered as debt. By using the debt ratio, analysts can check out the accurate liabilities for future decisions. Debts can be short-term or long-term but it depends on the company which term they have adopted. To calculate debts, the formula, (Short-term plus long-term) minus (cash plus cash equivalents). For computing the total debts, collect all the cash available in business funds and banks and then subtract all the debts.