A debtor is a person or enterprise that owes money to another party. (The party to whom the money is owed is often a supplier or bank that will be referred to as the creditor.)
A creditor is a person, bank, or other enterprise that has lent money or extended credit to another party. (The party to whom the credit has been granted is often a customer that will now be referred to as a debtor.)
If Company X borrowed money from its bank, Company X is the debtor and the bank is the creditor. If Supplier A sold merchandise to Retailer B, then Supplier A is the creditorand Retailer B is the debtor.
A debtor is a person or entity that owes money. In other words, the debtor has a debt or legal obligation to pay an amount to another person or entity.
For example, if you borrow $10,000 from a bank, you are the debtor and the bank is the creditor.
A creditor may be a bank, supplier or person that has provided credit to a company. In other words, a company owes money to its creditors. The amounts owed to creditors are reported on the company's balance sheet as liabilities.
If a creditor required the company to sign a promissory note for the amount owed, the company will record and report the amount as Notes Payable. If a creditor is a vendor or supplier that did not require the company to sign a promissory note, the company will likely report the amounts owed as Accounts Payable. Other examples of creditors include company's employees (who are owed wages and bonuses), governments (who are owed taxes), and customers (who made deposits or other prepayments).
Some creditors are known as secured creditors because they have a lien or other legal claim to the company's (debtor's) assets. Other creditors are often unsecured creditors since they do not have a lien or legal right to specific assets of the company.
Most balance sheets report the amounts owed to creditors in two groupings: current liabilities and non-current (or long-term) liabilities.
What is a lien?
A lien is a legal document filed by a creditor (lender) in order to record its claim on the debtor's (borrower's) property. The lien is recorded at a government's office. The lien provides a creditor with some protection or collateral until the debtor pays the creditor the amount owed.
Here are three examples of liens:
1. A bank may lend a retailer $50,000 but one of the conditions is that the bank will file a lien on the retailer's inventory. In this situation the bank's lien results in its loan becoming secured.
2. A mortgage is a lien filed by a lender in order to secure the lender's long-term real estate loan. The lien will require that the lender be paid the amount owed on the loan before the real estate can be transferred to another party.
3. The U.S. government may file a lien on a company's assets until a tax obligation has been paid.
A lien on a company's assets is to be disclosed in the company's financial statements.
In business a line of credit or credit line is an arrangement/commitment by a bank or other creditor with a customer. The agreement specifies an amount that the customer can borrow or use in the future, assuming that the customer's financial condition is maintained.
For example, a company may arrange with its bank to borrow money as needed but never owe the bank in excess of $500,000. The agreement might specify that interest will be calculated by multiplying the prime rate times the loan balance.
In the U.S. many individuals have a home equity line of credit that allows them to borrow up to the amount of "the line."
In accounting, the concept of materiality allows you to violate another accounting principleif the amount is so small that the reader of the financial statements will not be misled.
A classic example of the materiality concept or the materiality principle is the immediate expensing of a $10 wastebasket that has a useful life of 10 years. The matching principledirects you to record the wastebasket as an asset and then depreciate its cost over its useful life of 10 years. The materiality principle allows you to expense the entire $10 in the year it is acquired instead of recording depreciation expense of $1 per year for 10 years. The reason is that no investor, creditor, or other interested party would be misled by not depreciating the wastebasket over a 10-year period.
Determining what is a material or significant amount can require professional judgment. For example, $5,000 might be immaterial for a large, profitable corporation, but it will be material or significant for a small company that has very little profit.
The debt to equity ratio or debt-equity ratio is calculated by dividing a corporation's total liabilities by the total amount of stockholders' equity: (Liabilities/Stockholders' Equity):1.
A corporation with $1,200,000 of liabilities and $2,000,000 of stockholders' equity will have a debt to equity ratio of 0.6:1. A corporation with total liabilities of $1,200,000 and stockholders' equity of $400,000 will have a debt to equity ratio of 3:1.
Generally, the higher the ratio of debt to equity, the greater is the risk for the corporation's creditors and its prospective creditors.