The difference between debtors and creditors in bookkeeping

The terms ‘debtor’ and ‘creditor’ refer to key entities within the field of bookkeeping. It is important that both accountants beginning to establish their professional career and students interested in pursuing a career in bookkeeping possess a comprehensive understanding of these terms. By doing so, advancing accountants and aspiring bookkeepers can continue to hone their skills, expand their expertise and adeptly plan for the long term.

The distinction between debtors and creditors

A debtor is a person or enterprise that owes money to another party. Conversely, a creditor is a person, enterprise or bank who has lent money or extended credit to another party. As finance website E-conomic demonstrates, there are many different kinds of debtors and creditors:

Generally speaking, a debtor is a customer who has purchased a good or service and therefore owes their supplier money in return. Therefore, on a fundamental level, almost all companies and people will be debtors at one time or another. For accounting purposes, customers/suppliers are referred to as debtors/creditors… a creditor is a supplier: a person, organisation or other entity that sells a product or service as their business. This in essence means that all retailers are creditors, because they sell products or services.

Recording debtors and creditors in bookkeeping accounts

Bookkeepers are required to acquire, record and protect all of the relevant financial transactions for a particular person, company, bank or enterprise. These financial transactions will be recorded under a double entry bookkeeping system. As defined by Accounting Coach:

“The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company’s cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its cash account will decrease and its account Advertising Expense will increase”.(http://www.accountingcoach.com/blog/what-is-the-double-entry-system).

Under this double entry bookkeeping system, the debtors and creditors are referred to as ‘debit’ and ‘credit’ respectively. Debit entries will be made on the left side of an account while credit entries will be made on the right hand side of the account.

When a bookkeeper first creates an accounting system for their client they will create a ‘chart of accounts’ which lists the specific areas of their client’s finances which will be most likely to be influenced by their business transactions.

Within this chart of accounts there will be a ‘balance sheet’ which lists the financial position of the client according to their assets, liabilities and ownership interest. This balance sheet will be followed by an ‘income statement’ which lists the client’s income, equity, expenses, gains and losses.

With regards to debits and credits, under the left hand side of this double entry bookkeeping system debits are expected to increase assets and expenses and decrease liabilities, equity and income, while, on the right hand side of this account, credits are expected to decrease assets and expenses and increase liabilities, equity and income.

Under this double entry bookkeeping system, every entry that is made will affect at least two accounts. This is due to the fact that if at least one account will be debited then at least one account will have to be credited. Consequently, the total amount of money entered into an account as debits must equal the total amount entered as credits.