by The term creditor can mean different things depending on the situation, but it typically means a financial institution or person who is owed money.
If you’re the person who owes the money to a creditor, you may be referred to as a debtor or borrower.
Once a borrower and lender agree on terms for financing and sign a loan agreement, they’re entering into a contract. That contract often specifies the repayment agreement terms of the loan and the expected payment amounts.
You may hear the terms lender and creditor used interchangeably. The same goes for borrower and debtor. But you’ll more likely hear creditor and debtor used during legal proceedings where a creditor is trying to collect on an outstanding balance, such as during a bankruptcy case.
There are several types of creditors, such as real creditors, personal creditors, secured creditors and unsecured creditors.
Personal creditors: These are friends or family you owe money.
Real creditors: A real creditor is a financial institution, such as a bank or credit card issuer, that has a right to be repaid.
Secured creditors: These lenders have a legal right often through a lien to property you used as collateral to secure the loan.
Unsecured creditors: A credit card issuer is a good example of this type of creditor. You may owe money, but it’s unsecured debt, meaning you haven’t agreed to give the creditor any property such as a car or home as collateral to secure your debt.
Ex.
Auto loans: Similar to a mortgage, an auto loan is a loan that someone takes out in order to purchase a vehicle.
Mortgage: A mortgage is a loan you take out from a financial institution to purchase a house. In this case, the creditor would be the financial institution that provides the borrower with the mortgage loan.
Credit cards: Credit cards offer a revolving credit line with a specified credit limit. The credit card issuer that extended the credit line could be the creditor if you have an outstanding balance.
Student loans: Students who cannot afford the cost of tuition on their own can apply for financial aid, including student loans to cover expenses such as tuition, housing and books. When the time comes to repay the student loan, payments are made to the creditor.
Personal Loans: A personal loan is a loan often unsecured that can help you pay for a big project like home improvements or to consolidate debt. If you have an outstanding balance on the personal loan, the creditor is likely the lender that issued the loan.
The company can make the payment to creditors journal entry by debiting the payables account and crediting the cash account.
- If we pay creditor through cheque, then the journal entry will be
Creditor A/C Dr
To, Bank A/C
(Being creditors paid through cheque)
- If we pay creditor through cash, then the journal entry will be
Creditor A/C Dr
To, Cash A/C
| Account | Debit | Credit |
| Payables | ₹₹₹ | |
| Cash | ₹₹₹ |
Payable account here can be accounts payable, note payable, loan payable, or other types of payables depending on the type of debts the company has as well as the name of the ledger account in the chart of accounts for the credit it owes.
For example, when the company borrows the money from the bank, it may record the debt as note payable or loan payable for the liability it owes to the bank. On the other hand, if the company purchases goods on credit from its supplier, it may record the liability as the accounts payable or the trade payable depending on which one it deems.
