Debtors

Concept First

When a business sells goods or services and allows the customer to pay later, that customer becomes a debtor — someone who owes money to the business. The business has a right to receive that amount in the future. This right is an asset for the business, because it represents a future inflow of economic benefit (cash).

The key idea is simple: credit sales create debtors. The business has given up goods or services now, but will receive cash later. Until that cash is received, the debtor's balance is shown on the asset side of the balance sheet.

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Definition

Debtors are persons and/or other entities who owe an amount to the enterprise for goods bought or services received on credit.

The total amount due from all such persons and entities on the closing date is collectively called sundry debtors.

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Accounting Treatment

When a credit sale is made, the following journal entry is passed:

• Debit Debtors Account — because debtors are an asset, and an increase in an asset is debited.
• Credit Sales Account — because revenue is being recognised.

When the debtor pays later, the entry is:

• Debit Cash/Bank Account — asset increases.
• Credit Debtors Account — asset decreases (the right to receive is now settled).

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Presentation in the Balance Sheet

Sundry debtors appear on the assets side of the balance sheet, under current assets (since they are expected to be realised within the operating cycle, usually within a year).

A typical extract looks like this:

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Distinction from Similar Terms

• Debtors vs. Creditors: Debtors owe money to the business (asset). Creditors are those to whom the business owes money (liability).
• Debtors vs. Bills Receivable: A debtor is an open account balance. If the debtor formally accepts a bill of exchange, that bill becomes a separate asset called bills receivable. Both are assets, but bills receivable are more formal and negotiable. …