Understanding accounting and finance requires one to understand creditors and debtors thoroughly. Without this understanding, any person or business would not be able to resolve financials and make plans for the future. Let’s look at both of these terms thoroughly one by one.
A creditor is a legal person or a fiscal person who is authorized to make a collection. The easiest way to understand it is with the example of a company that goes bankrupt; its creditors have the power to demand compliance with its liabilities.
A creditor can be a person or a company that receives money for a debt or loan taken for the concession of goods and services. That is, it is a legal entity or a real person who must assume responsibility of returning the amount.
There are some occasions when a company cannot cope with its debts and ceases to have liquidity and solvency. This case is known as a broken bank and risks being seized by creditors, which is known as bankruptcy.
How are the creditors classified?
The creditors can be personal or real. Private creditors are those who have loaned to family or friends.
At this point, it is essential to emphasise that if there is no document in between a creditor and a debtor stating the loan, the creditor cannot take the debtor to court in case of default payments. In this type of contract between debtors and creditors, they can reflect each term, and the creditor has rights to any claim when necessary.
Examples of creditors
In daily life, we face creditors at all times. When the bank lends us money through a contract for a house, it often asks for some guarantee in case we are not able to pay, which is known as a mortgage.
At work, we are creditors since the company or institution for which we work must pay us a salary according to the laws and characteristics of the contract that we have signed when starting work.
As you can see in the daily development of life, sometimes we are creditors, but so that you know that other types of creditors exist, we can name the following:
They are also known as ordinary creditors. It is the first type of creditor, and yet it is the last one since it collects the debt after privileged creditors in case there are any.
According to a Greek term, they are known as chirographs. That is, they are subject only to simple writing, and in that document, there is no authority figure to back it up as a notary.
These types of creditors are authorized by law to be paid first then to other creditors. Which generally occurs with expenses related to taxes and justice. Likewise, those creditors that are backed by a contract also have an advantage over those simple creditors.
What is the difference between creditor and provider?
The main difference is that the supplier’s task is to supply or provide products to the company for their daily activity and thus be able to produce and then sell these goods or be able to present themselves with the service they offer.
The creditors also supply the company, and in this case, it is different types of resources. You could name the electricity companies; they provide a service to consumers. Therefore, they are called providers and not creditors. With credit, there is a legal liability, and it pretty much revolves around accounting terms.
The creditor has the right to withhold anything until the debt has been cancelled. That is, until he is paid what he’s owed and, if the person acquires another debt, he may withhold or extend the retention time. The creditor must take care of what he has as withheld item, and in case of not receiving the payment, he may with a notary take possession of said thing or pledge.
What are bankruptcy proceedings?
It is a judicial process, which is regulated by a branch of commercial law known as bankruptcy law. When the debtor is declared bankrupt, a procedure is carried out under the supervision of a judge to determine if they can meet part of the debt with the equity you own.
You should note that there may be agreements or deadlines that can reduce payments to find a satisfactory solution for all. Once you do this, you can proceed to the distribution of the debtor’s assets among the creditors.
Is the bank a creditor?
Indeed, the bank can be a creditor, at the time you receive a loan and have agreed to pay some fees and interest within a period. It may be a loan for your business or a home, for which many times the site or the acquired real estate can be seized if you do not pay.
The creditors are an essential figure in the accounting, at the time of making any contract, you must be aware of the payment conditions to avoid any inconvenience with the creditors, which is essential to start some venture or company.
In the case where creditors are family and friends, it is necessary to take into account that, if there is no document, it is difficult to establish a type of obligation, which can cause some problems in family relationships or friendships.
Let’s take an example.
A company that requests alternative financing through a bank needs circulating to stock up on materials that allow it to produce more since sales have increased, and it needs to increase its share. Request $100,000, and after studying the operation, the bank approves the process, is made available to investors. Once the amounts complete, the company receives the requested money by creating a loan contract in which the figure of the debtor and the creditor appears.
The company becomes the debtor of the operation, having to cancel the loan by returning the corresponding fees together with the established interest. In this case, the bank would be the intermediary party having to receive the agreed amount from the debtor (company) and transfer it to the creditor, which is to the investor who participates in the loan. At the time the total amount of the operation has been returned, the contract is terminated, and debtor and creditor figures disappear.
Therefore, the term creditor arises whenever a debt is created and will be terminated when that debt is settled.
A debtor is a person, physical or legal, who owes money to another person, known as a creditor.
The debtor is obliged to make the payment to the creditor on a previously agreed date. If the debtor does not comply with the agreement, the creditor can demand a real asset from the debtor as compensation — for example, a house or land.
Likewise, if no document justifies the debt, it is equally enforceable, but legally the obligation does not exist. Therefore, the creditor may not take any legal action against the debtor.
Exceptionally, everything is indicated, the creditor could try to recover the debt by lawful means, but it is difficult for a judge to recognise the deficit. Witnesses or other evidence not officially recognised but clarifying the case would be required.
Such would be the situation with a debt in which the debtor is a friend, relative, or trustworthy person to whom money was lent.
Types of debtors
As with the creditor, there are many types of debtors. We’ll discuss four types of debtors below:
- Fortuitous: The fortuitous debtor is one who cannot pay his creditor for unforeseeable and unavoidable acts. In these cases, you may be left without liability to the creditor.
- Lousy management: Due to ignorance or incompetence, they are unable to pay their debts to the creditor.
- Negligence: They carry out fraudulent activities to cause their insolvency and thus not pay the creditor.
- Own will: Refers to those debtors who decide, on their own will, and despite having sufficient means, not paying their debt.
Generally, failure to pay a debt by the debtor is not a crime. When a debtor is bankrupt and must pay several debts, he may choose to pay the obligations according to the priority he wishes, as long as the contrary is not set in the contracts signed with the creditors.
An example of a debtor due to force majeure would be one that is insolvent due to a natural catastrophe. Consequently, you cannot make the corresponding payment. While you may still be obliged to pay, the judiciary will not impose penalties. Also, in these cases, given that insurance does not cover this type of event, governments provide aid in the form of subsidies and moratoriums on compensation.
Regarding lousy management, it would be a manager who makes a company go bankrupt. That is, because of his inability to handle the situation.
For its part, the negligent could be a department manager who performs activities to harm the company. And, because of them, the company is unable to meet its obligations.
Finally, the one who does it on his own will would be a person who does not pay someone for revenge or simply because he does not want to.
What is the difference between creditor and debtor?
The debtor is the person obliged to fulfil an obligation or pay an amount of money to the creditor through an agreement concluded between them.
Both creditors and debtors are the persons involved in a legal obligation, and both can be both individuals and legal entities. This obligation of the debtor is to fulfil the benefit of giving, doing, or not doing.
The creditor is the active subject, while the debtor is the taxpayer of the legal relationship. Therefore, they are different figures, but there can be no figure without the other.
Examples of creditor and debtor
One of the most common models to differentiate between these two subjects is when a bank grants a credit or a loan of money to a client. In this case, the bank would be the creditor and the customer the debtor.
Now, there are many examples in daily life:
- In the purchase of some instalment goods, the seller would be the creditor, and the buyer would be the debtor.
- The telephone company would be the creditor against unpaid mobile bills.
- Before the delay in the payment of any tax, the Tax Agency would be the creditor.
Now you know what debit and credit are and how to do these two essential concepts in the field of account differ from each other. The ideas of debit and credit are pivots on which many theories and accounting concepts are based. These are the basic concepts, and they are relevant in the practical and theoretical work of accountants of all kinds around the world daily.
Not just accountants, but the knowledge and understanding of these two concepts is quite essential for any individual in professional terms. There are many instances where these concepts relate, and unless you have a firm understanding of it, you cannot be familiar with the right context of business situations.