Is creditor an asset or 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.