Liquid Assets− Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into cash in a very short period of time; for example, cash, bank, bills receivable, etc. Such a profit or loss statement is useful for all parties having stake in business like the management, lenders, investors, the proprietor or the partners or the shareholders, tax authorities and workers, etc. It is so because from its study, the management, can know whether the policies adopted by it were fruitful or not and can decide upon and possible, a change in the selling price or the advertising policy, etc. The relationship between a debtor and a creditor is critical to the extension of credit between parties, as well as the accompanying transfer of assets and liability settlement. When a creditor lends money versus extends credit, the creditor’s actions are somewhat different.
Mention any 2 important objectives of accounting –
The productive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and distinguish between debtors and creditors class 11 its ability to react to adverse situations. Revenue in accounting is the income of a recurring (regular) nature from any source. It includes the amount received from sale of goods, rent receipt, commission, dividend and interest received.
A company, for example, may borrow capital to grow its operations (i.e., become a debtor), while also selling its goods to customers on credit (i.e., be a creditor). The word creditor is derived from the Latin word “credit,” which means “to loan.” A creditor or lender is a party to whom money is owed. A creditor can be an individual, organisation, company, or government. The first party, in general, has provided some service or property to the second party under the assumption and trust of getting back the amount that has been lent. Thus, the difference between gain and profit is that gain is the economic benefit earned from activities outside of usual business, while profit is earned from the usual business activities. Summarising account information to study the financial position of a business.
On the contrary, a creditor represents trade payables and is a part of the current liability. A creditor is a person or entity to whom the company owes money on account of goods or services received. He discussed the details of memorandum, Journal, ledger and specialised accounting practice.
In other words, assets are the monetary values of the properties or the legal rights that are owned by the business organizations. The same information plays a confirmatoty role in respect of past prediction about, for example, the way in which the enterprise would be structured or the outcome of planned operations. Accounting collects information to help management in this regard. For instance, management would be able to know which department is overspending. Top level management requires information for planning, middle level management requires information for controlling the operations. They can be classified into – Financial Accounting, Managerial Accounting, Cost accounting, Internal accounting and Tax accounting.
Secured and unsecured creditors are the two types of creditors. Secured creditors only give loans to debtors who can put up a specified asset as security. In the event of a debtor’s bankruptcy, a secured creditor can seize the debtor’s collateral to cover the debtor’s losses. A mortgage, which uses a piece of property as security, is the most well-known example of a secured loan. The relationship that a debtor and a creditor share complements the relationship that a customer and supplier share.
This is due to the fact that the quantity of loaned cash might be fairly substantial, putting the creditor at significant risk of loss over a potentially long period of time. A company that lends money is likely to exist purely for the purpose of lending money. 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. Debtors are an integral part of current liabilities and represent the aggregate amount which a customer owe to the business.
What are the 3 most important financial statements to be prepared by the business?
Today the accounting information’s plays a vital role in a business enterprise. After Trading and Profit and Loss Account, Balance Sheet is prepared to show the financial position of the business. The techniques of recording, classifying and summarising the transactions have been explained in detail later in the book. All such informations are provided by the accounting which helps the management in planning, decision-making and controlling the business. Before allowing goods on credit to any person, first of all, the company checks his credibility, financial status and capacity to pay. 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.
Since the external users (e.g., Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users are basically interested in the solvency and profitability of an enterprise. Besides the function of book-keeping, accounting involves summarizing, analyzing, interpreting the financial statements and communicating the results to the users of these statements. Accounting is the language of business; it means that an enterprise communicates with the outside world, including the proprietors, through accounting statements.
In the case of Businesses when the credit sale incurs the customer shall become the debtor. Current Assets− Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day-to-day business activities; for example, cash, debtors, stock, etc.
- Whenever an entity sells its goods on credit to a person (buyer) or renders services to a person (receiver of services), then that person is considered as Debtor and the company is known as a creditor.
- The relationship that a debtor and a creditor share complements the relationship that a customer and supplier share.
- To ensure the smooth flow of the working capital, the company keeps tracking the time lag between the receipt of payment from the debtors and payment to creditors.
- Information may be relevant but so unreliable in nature or representation that its recognition may be potentially misleading and so it becomes useless.
Lending Money:
“The role of accounting has changed over the period of time.” Do you agree? The main purpose of accounting is to communicate the financial information to the users who analyze them as per their individual requirements. Accounting measures the transactions and events in terms of money which are considered as a common unit. Fixed Assets− These are those assets that are held for the long term and increase the profit earning capacity and productive capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.
What is the nature that debtors and creditors have in the firm’s books?
A transaction will be recorded in the books of accounts only if it is considered an economic event and can be measured in terms of money. Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in chronological order. The recording should be done in a systematic manner so that the information can be made available when required. The role of accounting has been changing over the period of time.
Distinguish between debtors and creditors, profit and gain
Gross profit or gross loss is the difference’ between the cost of goods sold and sales. Profit and Loss Account is prepared to ascertain whether during the period the firm earned a profit or suffered a loss. Net profit increases owner’s capital and net loss decreases it. A businessmen wants to know what the business owes to other and what it owns, and what happened to his capital whether the capital has increased, decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a Position statement (also known as Balance Sheet) which answers all these questions.
- In the exercise of judgement needed in making the estimate required under conditions of uncertainties so that assets or income are not overstated and liabilities or expenses are not understated.
- When a creditor lends money versus extends credit, the creditor’s actions are somewhat different.
- Then the former company will be debtor while the latter company is the creditor.
- Current assets are also known as floating assets or circulating assets as the amount and nature of such assets keeps changing continuously.
- Our NCERT Solutions for Class 11 Accountancy offer detailed explanations to help students with their homework and assignments.
Mastery and ample practice of the chapter’s concepts, as provided by these solutions, are the most effective ways to secure top marks in your exams. Tangible Assets− Assets that have a physical existence, i.e., which can be seen and touched, are tangible assets; for example, car, furniture, building, etc. Any valuable thing that has monetary value, which is owned by a business, is its asset.
If you’ve ever asked yourself, “What is the difference between debtors and creditors?” then you’re in the right place. This article is dedicated to dissecting the crucial elements that distinguish these two roles, by providing an extremely informative and elaborate understanding of the concept. This article will expound on the 10 key differences between debtors and creditors, who debtors are, who creditors are, and how these roles intertwine in the grand scheme of financial interactions. Once the financial transactions are recorded in journal or subsidiary books, all the financial transactions are classified by grouping the transactions of one nature at one place in a separate account. Accounting measurement and treatment of any transaction depends, to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal frame work.
The primary difference between a debtor and a creditor is that both terms refer to two parties involved in a lending transaction. The company’s debtors are listed as assets on the balance sheet, whereas the company’s creditors are listed as liabilities. The world of finance and business is filled with a variety of terms that can often be confusing.