What is Debtor vs. Creditor?

The key difference between a debtor vs. creditor is that both concepts denote two
counterparties in a lending arrangement. The distinction also results in a
difference in financial reporting. On the company’s balance sheet, the company’s
debtors are recorded as assets while the company’s creditors are recorded as
liabilities.

Debtor vs. Creditor

Note that every business entity can be both debtor and creditor at the same time.
For example, a company may borrow funds to expand its operations (i.e., be a
debtor) while it may also sell its goods to the customers on credit (i.e., be a
creditor).

A company must carefully manage its debtors and creditors to monitor the lag
between incoming and outgoing payments. The practice ensures that a company
receives payments from its debtors and sends payments to its creditors on time.
Thus, the company’s liquidity does not deteriorate while the default probability
does not increase.

What is a Debtor?
A debtor is a person or an organization that agrees to receive money immediately
from another party in exchange for a liability to pay back the obtained money in
due course of time. In other words, a debtor owes money to another person or
organization. The amount owed a debtor repays periodically with or without
interest incurred (debt almost always includes interest payments).

Depending on the type of undertaking, debt can be referred to in different terms.

For example, if a debt is obtained from a financial institution (e.g., bank), the
debtor is usually referred to as a borrower. If the debt is issued in the form of
financial securities (e.g., bonds), the debtor is referred to as an issuer.

If there is no possibility to meet the financial obligations, a debtor may file for
bankruptcy to seek protection from the creditors and relief of some or all debts.
Both individuals and companies can file for bankruptcy. Generally, a debtor can
initiate the bankruptcy process through a court. Note that only the court can
impose the bankruptcy upon a debtor. However, bankruptcy laws and rules can
widely vary among different jurisdictions.

In financial reporting, debtors are generally classified according to the length of

debt repayments. For example, short-term debtors are debtors whose
outstanding debt is due within one year. The amounts from short-term debtors
are recorded as short-term receivables under the company’s current assets.
Conversely, long-term debtors owe amounts that are due longer than one year.
The amounts are recorded as long-term receivables under the company’s long-
term assets.

What is a Creditor?
A creditor is a person or an organization that provides money to another party
immediately in exchange for receiving money at some point in the future with or
without additional interest. In other words, a creditor provides a loan to another
person or entity.

Creditors are generally classified as secured or unsecured. Secured creditors

provide loans only if the debtors are able to pledge a specific asset as collateral.
In case of a debtor’s bankruptcy, a secured creditor can seize the collateral from
the debtor to cover the losses from the unpaid debt. The most notable example of
a secured loan is a mortgage in which a piece of property is used as collateral.

On the other hand, unsecured creditors do not require any collateral from their
debtors. In case of a debtor’s bankruptcy, the unsecured creditors can make a
general claim on the debtor’s assets, but commonly, they are only able to seize a
small portion of the assets. Due to this reason, unsecured loans are considered
to be riskier than secured loans.

In accounting reporting, creditors can be categorized as current and long-term

creditors. Debts of current creditors are payable within one year. The debts are
reported under current liabilities of the balance sheet. Debts of long-term
creditors are due more than one year after and are reported under long-term
liabilities.