Debtor and Creditor7th August 2022 0 By indiafreenotes
A creditor could be a bank, supplier or person that has provided money, goods, or services to a company and expects to be paid at a later date. In other words, the company owes money to its creditors and the amounts should be reported on the company’s balance sheet as either a current liability or a non-current (or long-term) liability.
Some creditors, such as banks and other lenders, have lent money to the company and will require the company to sign a written promissory note for the amount owed. When a promissory note is required, the company borrowing the money will record and report the amount owed as Notes Payable.
If the creditor is a vendor or supplier that did not require the company to sign a promissory note, the amount owed is likely to be reported as Accounts Payable or Accrued Liabilities.
Other creditors include the company’s employees (who are owed wages and bonuses), governments (who are owed taxes), and customers (who made deposits or other prepayments).
Some creditors are referred to as secured creditors because they have a registered lien on some of the company’s assets. A creditor without a lien (or other legal claim) on the company’s assets is an unsecured creditor.
A debtor is a person, company, or other entity that owes money. In other words, the debtor has a debt or legal obligation to pay the amount owed.
A debtor is an individual or entity that owes money to a creditor. The concept can apply to individual transactions, so that someone could be a debtor in regard to a specific supplier invoice, while being a creditor in relation to its own billings to customers. Even a very wealthy person or company is a debtor in some respects, since there are always unpaid invoices payable to suppliers. The only entity that is not a debtor is one that pays up-front in cash for all transactions. Thus, an entity could be a debtor in relation to specific payables, while being flush with cash in all other respects.
A debtor is considered to be in default if it does not pay a debt within the payment terms of the debt agreement. Thus, a short payment or late payment could trigger a default.
The liability owed by a debtor can be discharged in bankruptcy, or with the agreement of the counterparty. In either case, if the liability is no longer valid, the entity involved is no longer a debtor in relation to that liability.