Please briefly explain why you feel this question should be reported.

Please briefly explain why you feel this answer should be reported.

Please briefly explain why you feel this user should be reported.

Sign InSign Up

AccountingQA

AccountingQA Logo AccountingQA Logo

AccountingQA Navigation

  • Home
  • Ask Questions
  • Write Answers
  • Explore
  • FAQs
Search
Ask A Question

Mobile menu

Close
Ask a Question
  • Home
  • Questions
    • Most Visited
    • Most Active
    • Trending
    • Recent
  • Follow
    • Categories
    • Users
    • Tags
  • Write an Answer
  • Badges & Points
  • Request New Category
  • Send a Suggestion
  • Search Your Accounting Question..

Ishika Pandey
Ishika PandeyCurious
In: 1. Financial Accounting > Miscellaneous

Is creditor an asset or liability ?

Is creditor an asset or liability ?
  • 1 1 Answer
  • 0 Followers
  • 0
Share
  • Facebook

    You must login to add an answer.


    Forgot Password?

    Need An Account, Sign Up Here

    1 Answer

    • Voted
    • Recent
    1. SidharthBadlani CA Inter Student
      2023-02-05T12:58:20+00:00Added an answer on February 5, 2023 at 12:58 pm
      This answer was edited.

      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.

      • 0
      • Share
        Share
        • Share on Facebook
        • Share on Twitter
        • Share on LinkedIn
        • Share on WhatsApp

    Related Questions

    • What comes in debit side of Realisation account?
    • What is recorded in the Realisation account?
    • What is not included in Realisation account?
    • What is recorded on the credit side of a Realisation account?
    • Can accounts payable have a debit balance?
    • Why is profit on debit side?
    • Is goodwill a fixed asset?

    Sidebar

    Question Categories

    • 1. Financial Accounting

        • Accounting Terms & Basics
        • Bank Reconciliation Statement
        • Banks & NBFCs
        • Bills of Exchange
        • Capital & Revenue Expenses
        • Consignment & Hire Purchase
        • Consolidation
        • Contingent Liabilities & Assets
        • Departments & Branches
        • Depreciation & Amortization
        • Financial Statements
        • Goodwill
        • Insurance Accounting
        • Inventory or Stock
        • Investment Accounting
        • Journal Entries
        • Ledger & Trial Balance
        • Liquidation & Amalgamation
        • Miscellaneous
        • Not for Profit Organizations
        • Partnerships
        • Ratios
        • Shares & Debentures
        • Source Documents & Vouchers
        • Subsidiary Books
    • 2. Accounting Standards

        • AS
        • IFRS
        • IndAS
    • 3. Cost & Mgmt Accounting
    • 4. Taxes & Duties

        • GST
        • Income Tax
    • 5. Audit

        • Bank Audit
        • Internal Audit
        • Miscellaneous - Audit
        • Statutory Audit
    • 6. Software & ERPs

        • Tally
    • 7. MS-Excel
    • 8. Interview & Career
    • Top Questions
    • I need 20 journal entries with ledger and trial balance?

    • Can you show 15 transactions with their journal entries, ledger, ...

    • What is furniture purchased for office use journal entry?

    • What is loose tools account and treatment in final accounts?

    • What is the Journal Entry for Closing Stock?

    • Following is the Receipts and Payments Account of Bharti Club ...

    • What is the journal entry for goods purchased by cheque?

    • Prepare Income and Expenditure Account of Youth Club from the ...

    • What is mobile phone depreciation rate?

    • How to show adjustment of loose tools revalued in final ...

    Hot Topics

    Accounting Policies Accounting Principles Balance Sheet Bank Reconciliation Statement Bill of Exchange Branch Accounting Calls in Advance Capital Capital Expenditure Companies Act Compound Entry Consignment Creditors Current Assets Debit Balance Debtors Depreciation Difference Between Dissolution of Firm Dissolution of Partnership Drawings External Users Fictitious Assets Final Accounts Financial Statements Fixed Assets Fixed Capital Fluctuating Capital Gain Impairment Installation Interest Received in Advance Internal Users Journal Entry Ledger Loose Tools Miscellaneous Expenditure Profit Rent Rent Received in Advance Reserves Revaluation Revenue Expenditure Revenue Reserve Sacrificing Ratio Subscription Subscription Received in Advance Trial Balance Type of Account Uncalled Capital
    • Home
    • Questions
      • Most Visited
      • Most Active
      • Trending
      • Recent
    • Follow
      • Categories
      • Users
      • Tags
    • Write an Answer
    • Badges & Points
    • Request New Category
    • Send a Suggestion

    Most Helping Users

    Astha

    Astha

    • 50,286 Points
    Leader
    Simerpreet

    Simerpreet

    • 72 Points
    Helpful
    AbhishekBatabyal

    AbhishekBatabyal

    • 65 Points
    Helpful

    Footer

    • About Us
    • Contact Us
    • Pricing
    • Refund
    • Forum Rules & FAQs
    • Terms and Conditions
    • Privacy Policy
    • Career

    © 2021 All Rights Reserved
    Accounting Capital.