What is the Difference Between a Debtor and a Creditor?

Difference Between a Debtor and a Creditor

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Difference Between a Debtor and a Creditor

In financial and accounting terms, a debtor and a creditor are defined from the perspective of the company recording the transactions:

  • Debtor: A debtor is an individual, company, or entity that owes money. When viewed from the company’s perspective, a debtor is a customer who owes the company money, usually as a result of the purchase of goods or services on credit. For instance, if a business sells a product to a customer and allows them to pay later, the customer is considered a debtor until they pay off the debt.
  • Creditor: A creditor, on the other hand, is an individual, company, or entity that is owed money. From the company’s perspective, a creditor is someone the company owes money to. This could be a supplier from whom the company has purchased goods or services on credit, or a bank or financial institution from whom the company has borrowed money.

So, in summary, a debtor owes money, while a creditor is owed money.

Example of the Difference Between a Debtor and a Creditor

Let’s consider a hypothetical company, “RetailCo”, that sells electronics:

One day, a customer, “Customer A”, purchases a television from RetailCo but doesn’t pay immediately, instead choosing to buy on credit. RetailCo agrees and allows Customer A to take the television home and pay later. Until Customer A pays for the television, they are considered a debtor to RetailCo. They owe RetailCo money for the television they have purchased.

On the other hand, RetailCo sources its electronics from a manufacturer, “ManuCo”. RetailCo orders and receives a new batch of electronics from ManuCo but doesn’t pay immediately. Instead, they arrange to pay ManuCo in 30 days. Until RetailCo pays ManuCo for the electronics, ManuCo is considered a creditor of RetailCo. RetailCo owes ManuCo money for the electronics it has received.

In these examples, the debtor, Customer A, owes money, while the creditor, ManuCo, is owed money. The relationships in each case are defined by who owes (debtor) and who is owed (creditor).

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