What Are Debtors?
In accounting, debtors are individuals or entities that owe money to an organization, typically as a result of the sales of goods or services provided on credit. These amounts are represented on the company’s balance sheet under current assets. The effective management of debtors is crucial for maintaining liquidity and ensuring that the organization can meet its financial obligations.
A company’s engagement with debtors is tracked through various accounts and control mechanisms:
- Debtors’ Ledger Control Account: This is a summary account showing the total amount owed by all the debtors combined. It is found in the general ledger and reflects in the balance sheet under current assets.
- Debtors’ Ledger: This is a subsidiary ledger containing detailed information about each individual debtor. It helps in monitoring and managing the amounts owed by different customers.
- Provision for Bad Debts: This is a reserve created to account for the risk of some debts not being collected. It ensures that the financial statements present a more accurate picture of the company’s financial health.
Examples
Example 1: Retail Company
Imagine a retail company that sells electronic gadgets. They have sold goods worth $50,000 on credit to various customers. The individual amounts owed by these customers are recorded in the debtors’ ledger, and the total amount is reflected in the debtors’ ledger control account on the balance sheet.
Example 2: Service Provider
A consulting firm has provided services amounting to $25,000 with payment terms spread over the next three months. The $25,000 will be recorded as a debtor on the balance sheet.
Example 3: Long-term Debtors
A construction company completes a project for a client who agrees to pay over five years. The amount due in the next year is listed under current assets, while amounts due afterward are disclosed separately under long-term debtors.
Frequently Asked Questions (FAQs)
What is the difference between a debtor and a creditor?
- Debtor: Owes money to the organization.
- Creditor: The organization owes money to them.
How are debtors recorded in financial statements?
Debtors are recorded under current assets on the balance sheet. If some amounts are due in more than one year, those amounts should be disclosed separately.
What is a Provision for Bad Debts?
Provision for bad debts is an estimate of the amount of debtors that may not be collectible. This is subtracted from the total debtors to give a more realistic view of receivables.
Why do companies keep a Debtors’ Ledger?
A debtors’ ledger is kept to track individual debts and to ensure accurate recording and management of amounts owed by various customers. It provides a detailed breakdown versus the aggregated view in the debtors’ ledger control account.
What is the purpose of periodically checking the debtors’ ledger with the debtors’ control account?
This practice enhances internal control by ensuring that the records in individual accounts match the total reported in the control account, thus detecting errors or discrepancies early.
Related Terms with Definitions
- Accounts Receivable: Amounts owed to the company by its customers for goods or services provided on credit.
- Bad Debt: Debt that is unlikely to be collected and is written off as a loss.
- Credit Sales: Sales where payment is deferred to a future date.
- Current Assets: Assets that are expected to be converted to cash or used up within one year.
- General Ledger: A complete record of all financial transactions over the life of the company.
Online References
- Investopedia - Debtors
- Corporate Finance Institute - Accounts Receivable
- Accounting Tools - Bad Debt
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Accounting Made Simple” by Mike Piper
Accounting Basics: “Debtors” Fundamentals Quiz
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