Accounting has a habit of giving perfectly ordinary things slightly intimidating names and ‘Debtors’ and ‘Creditors’ are no exception. They sound similar, they’re easy to mix up, and neither word gives you much of a clue about what it means.
The simplest way to remember it is:
Debtors owe money to your business.
Creditors are people or businesses your business owes money to.
What is a debtor?
A debtor is someone who owes your business money. Usually, that means you’ve sent a customer an invoice and you’re still waiting for them to pay it.
For example, imagine you complete £800 of work for a client and send them an invoice with 14-day payment terms.
Until that £800 is paid, the customer is one of your ‘debtors’.
In Xero, you’ll normally see this sitting within ‘accounts receivable’ (another accounting term that simply means money you’re due to receive from customers.)
Once the customer pays, the amount they owe is cleared.
What is a creditor?
A creditor is the other way around – someone your business owes money to.
Perhaps a supplier sends you a £300 invoice for materials and gives you 30 days to pay.
Until you pay that bill, the supplier is one of your ‘creditors’.
In Xero, these amounts will usually sit within ‘accounts payable’ (money your business needs to pay to suppliers).
And, as before, once the bill is paid, that outstanding amount is cleared.
A quick example
Let’s say you run a small photography business.
You’ve photographed a commercial job and invoiced your client £1,200. They haven’t paid you yet.
At the same time, you’ve received a £250 invoice from a second photographer who helped you on the shoot, and you haven’t paid them yet either
So:
- the client owing you £1,200 is a ‘debtor’
- the second photographer you owe £250 to is a ‘creditor’
Your business is owed money in one direction and owes money in the other.
Why does understanding debtors and creditors matter?
Because sending an invoice doesn’t necessarily mean you have the money.
You could have £10,000 of sales showing in your accounts while several thousand pounds of those invoices are still sitting unpaid.
Likewise, the money currently in your bank account isn’t necessarily all available to spend if you have supplier bills waiting to be paid.
Keeping an eye on both helps you understand:
- how much customers still owe you
- how much your business still needs to pay
- whether invoices are becoming overdue
- and this one is super important – what your short-term cash position really looks like
It’s one of the reasons good bookkeeping is about more than simply looking at your bank balance.
Where do they appear in your accounts?
Outstanding customer invoices (your debtors) normally appear on the balance sheet as an ‘asset’, because they’re money the business expects to receive.
Outstanding supplier bills (your creditors) normally appear as a ‘liability’, because they’re amounts the business is expected to pay.
So if you’ve ever looked at a balance sheet and wondered why money you haven’t received yet appears as something the business owns, that’s the logic behind it.
Aged debtors and creditors
If someone mentions your ‘aged debtors’, they’re essentially talking about your unpaid customer invoices and how long they’ve been outstanding.
An ‘aged creditors’ report does the same thing for supplier bills you haven’t yet paid.
A quick recap
A ‘debtor’ is the person who has the debt. A ‘creditor’ is the person who has the claim to the money.
They owe us? They’re a debtor.
We owe them? They’re a creditor.
