Definition
Creditors are entities or individuals to whom an organization or person owes money. Creditors can be unpaid suppliers of goods or services, financial institutions, or any entities that have extended credit. They are a crucial part of the company’s balance sheet indicating the amounts payable in the short term (current liabilities) or long term (long-term liabilities).
Detailed Explanation
Creditors’ Ledger Control Account
The creditors’ ledger control account is an accounting record summarizing all individual creditor accounts. It provides a snapshot of the total amount outstanding to all creditors at any given time. This control account balances must match the total of the individual creditors’ accounts to ensure accuracy.
Classification on Balance Sheet
- Current Liabilities: These are amounts owed to creditors that are due within one year. They represent short-term debts that the company needs to pay soon.
- Long-term Liabilities: These are amounts owed to creditors that are due after one year, representing long-term financial obligations.
Importance of Payment Control
Managing creditor payments effectively can provide financial stability. Ensuring that full credit periods are utilized and taking advantage of prompt-payment discounts can improve cash flow and reduce costs.
Examples
- Supplier Credit: A manufacturing company owes $20,000 to a raw material supplier, payable in 60 days.
- Bank Loan: An organization has a $500,000 bank loan repayable over five years.
- Utility Bills: Utility bill payments due within 30 days make them current liabilities if unpaid.
Frequently Asked Questions (FAQs)
What are creditors in accounting?
Creditors are individuals or organizations to whom a company owes money for goods or services provided, or loans taken.
How are creditors classified in a balance sheet?
Creditors are classified into current liabilities if the amount is payable within one year and long-term liabilities if payable after one year.
Why is it important to control payments to creditors?
Controlling payments to creditors ensures that the company maintains good credit relationships, takes full advantage of credit terms, and secures any prompt-payment discounts available.
What is the creditors’ ledger control account?
The creditors’ ledger control account aggregates the total amounts owed to all individual creditors and ensures the accuracy of payable records.
What are examples of creditor liabilities?
Examples include unpaid supplier bills, short-term loans, and accrued expenses, categorized as either current or long-term liabilities based on payment terms.
Related Terms
Debtors
Individuals or entities that owe money to the organization or individual. The balance due from debtors typically forms part of accounts receivable.
Accounts Payable
Amounts the organization owes to suppliers for items or services purchased on credit, recorded as a liability on the balance sheet.
Accounts Receivable
Amounts owed to the organization by customers due to sales made on credit.
Working Capital
A short-term financial metric representing the difference between an organization’s current assets and current liabilities.
Liquidity
A measure of an organization’s ability to meet short-term obligations with available assets.
Online Resources
- Investopedia - Creditors
- Accounting Coach – Creditors
- Coursera – Introduction to Financial Accounting
- Khan Academy – Managing Accounts Payable
Suggested Books for Further Studies
- “Financial Accounting” by Walter T. Harrison Jr. and Charles T. Horngren
- “Advanced Accounting” by Joe Ben Hoyle, Thomas Schaefer, and Timothy Doupnik
- “Accounting Principles” by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Creditors” Fundamentals Quiz
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