Accountancy · Ch 1 — Introduction to Accounting
Creditors
Creditors
Creditors
A creditor is a person or other entity to whom the enterprise owes money for goods or services received on credit. When a business buys stationery, furniture, or any other item and does not pay for it immediately, the seller becomes a creditor of the business.
The key idea is that creditors represent an obligation — the business has received the benefit of the goods or services but has not yet parted with the cash. This obligation is a liability.
Accounting Treatment
When goods are purchased on credit, the journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Purchases A/c Dr. | xxx | |||
| To Creditor's A/c | xxx | |||
| (Being goods purchased on credit) |
The Purchases account is debited because the expense (or asset, depending on the inventory system) has been incurred. The Creditor's account is credited because the liability has been created.
Balance Sheet Presentation
The total amount standing to the credit of all creditors on the closing date is shown in the Balance Sheet as Sundry Creditors on the liabilities side. It is a current liability because it is typically payable within a short period (usually the operating cycle of the business).
Creditors are always a liability — they represent amounts the business must pay in the future. They appear on the liabilities side of the Balance Sheet.
Distinction from Debtors
A debtor is a person who owes money to the business (an asset). A creditor is a person to whom the business owes money (a liability). This is a fundamental distinction in accounting.
Illustration from the Textbook
In the Test Your Understanding - V problem, Mr. Sunrise bought stationery items of ₹1,50,000 from Mr. Peace on credit. Therefore:
- Who is the creditor? Mr. Peace
- Amount payable to him? ₹1,50,000
This amount will appear as Sundry Creditors in the Balance Sheet of Mr. Sunrise's business.