por What are sundry debtors?
The sundry debtors account includes the accounting entries of individuals or entities that owe money for reasons unrelated to the company’s regular trade. In accounting, the balance sheet is used as if it were a photograph, a reliable and real reflection of the economic situation of a company.
This report details the assets, liabilities, and equity of a company at a specific time. Within this balance sheet there are different accounts and one of these is that of various debtors, which is part of the current assets of a company.
This current asset is the company’s assets, economic assets and receivables that are pending use in less than a year among the various debtors. An example of this is employee loans that mature in months.
The balance sheet is the starting point for analyzing the financial strength of a company. Unlike other reports—such as the income statement, which details a company’s profits and expenses over a period—the balance sheet lists all of a company’s assets and liabilities at the present time, and does so through your accounts.
Definition of sundry debtors and examples
Miscellaneous debtors is a collective account within the balance sheet that groups together the total credits owed by various people who are not classified as customers.
Examples of these sundry debtor accounts may be cash loans to employees or third parties, sale of already depreciated fixed assets, or other items that are not merchandise, among others.
The importance of this accounting account is that, although they are small loans to various individuals or companies, they are loans that expire and can be claimed within the accounting year.
Active or passive?
As mentioned in the previous point, miscellaneous debtors is an accounting account that includes different individuals or companies that, without being classified as customers, have an economic debt with the company.
What is the nature of this sundry debtor account: is it part of the asset or liability? Let’s define both concepts to have them clearer.
Assets are items that the company owns and uses to conduct business. Instead, the liability is what the company owes to others. Shareholders’ equity is essentially the difference, comparable to a company’s net worth.
The main difference between asset and liability accounts is that assets provide a future economic benefit, while liabilities present a future obligation. Therefore, an indicator of a successful business is one that has a high asset to liability ratio.
Debts that companies or individuals have with the company that do not come from the usual marketing of the same, suppose a future economic benefit; that is, they form part of the company’s assets.
The assets are the resources available to the company to carry out its operations, which represents all the assets and rights that are owned by the business.
Sundry debtors involve debts receivable by the company and, therefore, payment rights that result in resources from the company; that is, assets.
The difference between assets and liabilities is known as equity, net assets, net worth, or company capital, and according to the accounting equation, net worth should equal assets minus liabilities.
Difference between debtor, creditor and customer
Although these terms are seemingly simple, they can often be confused. Above all the term debtor and creditor may not be so clear in its distinction, especially for small businesses.
What is a debtor?
A debtor is a party that owes money to another. As simple as that. It can be from an individual —that is, an individual—, to a small company, or even a government or official body. It differs from the client in that its debt does not come from the company’s usual trade.
The debtor is normally required to repay the money owed within a defined period, often with additional interest payments as an incentive to lend money.
In a small company you can have debtors and also be, at the same time, a debtor against others.
What is a creditor?
The creditor represents the opposite side of this transaction: it is the party that has lent money, a service or a good to an individual or company.
Banks and other financial institutions account for a large part of the creditors that operate within the current economy, although market developments have created other options, such as loans from individuals to companies.
What is a client?
A customer is one of the parties to a commercial transaction that receives or consumes products (goods or services) and has the ability to choose between different products and suppliers.
So, customers who have purchased products or services that have not yet paid are debtors of the company that sells, which acts as a creditor in this case. In the same way, the company that sells is indebted to its suppliers if they have provided it with raw materials that it still has to pay in full.
The relationship between the terms creditor and debtor is important, especially for small businesses, as they affect the assets and liabilities on your balance sheet.
Being a creditor to another company can be considered an asset, demonstrating the financial strength of the company in question, while excessive debt is considered a risk.
Why is it called balance sheet?
The three balance sheet items—assets, liabilities, and equity—provide investors with the most accurate and detailed idea of what the company owns and owes, as well as what shareholders invested.
It’s called the balance sheet because, after all, it’s the two sides of the scale (assets on the one hand and liabilities plus shareholder equity on the other) that must balance.
The motivation behind balance sheet equivalence is not technical, it is simple: on the asset side I list “what I have”, and on the liability side I list “who owns it”.
References
Accounting Coach. What is the meaning of sundry and sundry debtors?. accountingcoach.com
Business dictionary. Definition sundry debtors. businessdictionary.com
Legal Information Institute. Debtor and creditor. law.cornell.edu
Investopedia. Breaking Down Balance Sheet. investopedia.com
Accounts and Legal. Small business advice, debtors and creditor explained. 23.02.20017. accountsandlegal.co.uk