Debtors are treated as an asset.

A debtor is a person or an entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.

When goods are sold to a person on credit that person is called a debtor because he owes that much amount to the enterprise.

Debtors are considered assets in the balance sheet and are shown under the head of current assets.

For example – Ram Sold goods to Sam on credit, Sam did not pay for the goods immediately, so here Sam is the debtor for Ram because he owes the amount to Ram. This amount will be payable at a later date.

Liabilities Vs Assets

Liabilities

It means the amount owed (payable) by the business.  Liability towards the owners ( proprietor or partners ) of the business is termed internal liability. For example, owner’s capital, etc

On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability.
For example creditors, bank overdrafts, etc.

Assets

An asset is a resource owned or controlled by a company. The benefit from the asset will accrue to the business in current and future periods. In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – machinery, building, etc.

Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. They are readily realizable into cash.

In other words, we can say that the expected realization period of current assets is less than the operating cycle period.

For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.

Why debtors are treated as assets?

Now let me explain to you why debtors are treated as assets and not as liabilities because of the following characteristics :

• We can say that the expected realization period is less than the operating cycle period.
• Expected to be converted into cash in the normal course of business.
• In the business, debtors are treated as current assets which we can see on the asset side of the balance sheet.
• Debtors have a debit balance.

Conclusion

Now after the above discussion, I can conclude that debtors are considered to be an asset and not a liability.

Yes, a creditor is a liability. Creditors are treated as current liability.

A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.

Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.

In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.

Why are Creditors treated as a liability?

An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc

A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.

As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.

Treatment and Importance of Creditors

Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.

The significance/importance of creditors is as follows:

• The amount due to creditors affects the current and acid test ratio of a company significantly.
• It affects the short-term cash requirements of a company.
• It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
• Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.

We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.

Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.