Let’s take a look at the overview of all topics and Basic Accounting Definitions covered in our video. Explain the qualitative characteristics of accounting information. Conversely, the Latin meaning of creditor is ‘to loan’. Fictitious Assets− These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. They represent loss or expense that are written off over a period of time, for example, if advertisement expenditure is Rs 1,00,000 for 5 years, then each year Rs 2,00,000 will be written off. Detecting and preventing frauds and errors− It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the finance.
- It is incurred for maintaining profitability of the business.
- Fixed assets− These are held for long term and increase the profit earning capacity of the business, over various accounting periods.
- In the normal course of business, goods are bought and sold on credit, which is not a new thing.
- It refers to a statement that indicates the liability a borrower will repay their loan.
Here we are also going to differentiate between Creditors and debtors. At last, we are going to discuss some important questions related to this topic. Bankruptcy is a legal proceeding for people or businesses that are unable to repay their outstanding debts.
NCERT Solutions for Class 11 Commerce Accountancy Chapter 1 – Introduction To Accounting
Creditors are generally classified as secured or unsecured. Secured creditors provide loans only if the debtors are able to pledge a specific asset as collateral. In case of a debtor’s bankruptcy, a secured creditor can seize the collateral from the debtor to cover the losses from the unpaid debt. The most notable example of a secured loan is a mortgage in which a piece of property is used as collateral. In financial reporting, debtors are generally classified according to the length of debt repayments. For example, short-term debtors are debtors whose outstanding debt is due within one year.
Debtors are often grouped in financial reporting based on the period of their debt repayments. Short-term borrowers, for example, are those whose outstanding debt is due within a year. Short-term debtors’ payments are accounted for as short-term receivables in the company’s current assets. In accounting reporting, creditors can be categorized as current and long-term creditors.
Investors and potential investors− They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business. Capital− It refers to the amount invested by the owner of a firm. It is an obligation of the business towards the owner of the firm, since business is treated separate or distinct from the owner. These are the users who are internal to an organisation.
These limitations of accounting must be kept in view while making use of the accounting information. The word ‘debtor’ is derived from a Latin word ‘debere’, which means ‘to owe’. In this way, the term debtor means the party who owes a debt which needs to be payable by him in short duration. Debtors are the current assets of the company, i.e. they can be converted into cash within one year. They are shown under the head trade receivables on the asset side of the Balance Sheet. Creditors are the ones that extend credit to debtors.
For an efficient Working Capital cycle, every company maintains a time lag between the receipt from debtors and payment to creditors. So that, the flow of working capital will go smoothly. Revenues− Revenues refer to the amount received from day to day activities of the business, likesale proceeds of goods and rendering services to the customers.
What is a Creditor?
Get answers to the most common queries related to the K12 CBSE Class 11 Examination Preparation. Great article, a really good overview of the credit management fundamentals. Understandability− Accounting information should be presented in such a way that every user is able to interpret the information without any difficulty in a meaningful https://1investing.in/ and appropriate manner. Tangible Assets− Assets that have physical existence, i.e., which can be seen and touched, are tangible assets; for example, car, furniture, building, etc. They are shown as assets in the Balance sheet under Current Assets. A restaurant owner X is buying vegetables from a farm owner and making dishes for customers.
Over the course of the repayment period, creditors collect payments from debtors, and they often report information about those payments with credit reporting agencies. If the debtor fails to pay on time, the creditor may report that, too, which can damage the debtor’s credit score. A debtor can be defined as the individual or firm who receives the benefit without paying for it in terms of money or money’s worth immediately but is liable to pay the money back in due course of time. The debtors are shown as an asset in the balance sheet. Creditors are the current liabilities of the company, whose debt is to be paid within one year.
Customers that buy goods or services and pay on the spot are not debtors. However, customers of companies that provide goods or services can be debtors if they are allowed to make payment at a later date. If a debtor fails to pay a debt, creditors have some recourse to collect it. If the debt is backed by collateral, such as mortgages and car loans backed by houses and cars, the creditor can attempt to repossess the collateral. In other cases, the creditor may take the debtor to court in an attempt to have the debtor’s wages garnished or to secure another type of repayment order.
To ensure the smooth flow of the working capital cycle, a company must keep a track of the time lag between the receipt of payment from the debtors and the payment of money to the creditors. Creditors are the parties, to whom the company owes a debt. Here, the party can be an individual or a company which includes suppliers, lenders, government, service providers, etc. Whenever the company purchases goods from another company or services are provided by a person and the amount is not yet paid. Then that individual or company is regarded as the creditor.
Difference between Creditor and Debtor
Credit policy is made by the management of the company which takes decisions regarding credit period allowed to debtors as well as discount allowed to them for making early payments. However, still, there is a possibility that some debtors fail to pay the sum in time for which they have to pay interest for making a late payment. Debtors and Creditors are both critical financial indicators and important parts of the financial statements of a company.
External users of information are the individual or the organisations that have direct or indirect interest in the business firm; however, arenot a part of management. They do not have direct access to the internal data of the firm and uses published distinguish between debtors and creditors class 11 data or reports like profit and loss accounts, balance sheets, annual reports, press releases, etc. Some examples of external users are government, tax authorities, labour unions, etc. Secured and unsecured creditors are the two types of creditors.
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A charge-off means a debt is deemed unlikely to be collected by the creditor, but the debt is not necessarily forgiven or written off entirely. A judgment lien is a court ruling giving a creditor the right to take possession of a debtor’s property if the debtor doesn’t fulfill their obligations. If you’re planning to borrow money, it’s important to build and maintain a good credit score and also monitor your credit regularly to maximize your chances of getting approved for affordable financing. Creditors can be used to describe a person who gives a loan to any other person and in return, he supposes to get interest on the loan he is giving.
Thus, there is a creditor and a debtor in every lending arrangement. The relationship between a debtor and a creditor is crucial to the extension of credit between parties and the related transfer of assets and settlement of liabilities. The actions of the creditor are somewhat different when it is lending money, versus when it is extending credit. Covenants are unheard of when granting trade credit. An entity that extends credit is in the business of selling goods or services, and only engages in the extension of credit as an ancillary function. It may be necessary to extend credit simply to be competitive in the marketplace.
Mention any 2 important objectives of accounting –
A lender or a creditor could be an Individual, association, company, or government that has provided a loan or credit to an entity and has claims on them. The first party has handed some money or goods and services to the alternate party under the supposition that the alternate party will return the original payment and service. Creditors are categorised as current and non-current or long-term creditors. Non-current creditors are repaid after a period of one year and are recorded under long term arrears in the balance sheet. Current creditors are repaid in a span of one year or in the working cycle of business, whichever is smaller.
You’ll then make payments based on the agreement until you pay the loan in full, refinance the debt or sell the home. Creditors typically have underwriting processes that determine which debtors are eligible for a loan, credit card or line of credit. They also determine the terms of the credit relationship, including interest rate, any fees and loan term, which the debtor can accept or reject. In most cases, creditors are banks, credit unions and other lending institutions.
Amount received from sales of goods and services to customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital. If the accounting information is not clearly presented, then the qualitative characteristics like, comparability, reliability and understandability, are violated. This is because if the accounting information is not clearly presented, then meaningful comparison may not be possible, as the data is not trustworthy, which may lead to faulty conclusions.
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