What on earth is a creditor? You may have found yourself asking exactly this question, all whilst nodding in gentle and bemused agreement with your accountant as they lay out in painstaking detail all of the “creditors” of your business. And then it’s the same story with “debtors”, all before delving into the murky world of “equity”.
First things first, you’re not alone! There will be countless others around the world nodding along in exactly the same way, trying desperately to stop a slightly confused and exasperated expression from taking over their face.
As accountants, we deal with this jargon on a daily basis but, rest assured, when any accountant started their career, they were just as puzzled by this terminology. So, let’s take some time to demystify five of the main culprits;
#1 – Assets
Put simply, an asset of a business is anything that the business either owns, or is owed. Your business will have a bank account – the money held in that account is an asset. Your business may own some computer equipment – that equipment is an asset of your business. You may even have paid for a full year of insurance up front – that year of insurance is owed to your business and that is an asset. Debtors are also assets of your business, which brings me to number two on the list;
#2 – Debtors
A debtor is simply someone who owes your business money. That may be because your business has sold some goods or provided a service to a customer for which it is yet to be paid, or may simply be because your business has lent some money to another individual or business and so is owed that money back.
#3 – Liabilities
Liabilities are the opposite of assets and are anything that your business owes. Your business may have taken a loan from the bank – the balance of that loan account is a liability. Your business may owe taxes to HMRC – those taxes are a liability. In much the same way that debtors are a type of asset, creditors are a type of liability.
#4 – Creditors
A creditor is another individual or business to which your business owes money. The most common instance of a creditor is where your business has been provided with a service or goods, and is yet to pay the provider for them.
#5 – Equity
Equity is perhaps the most difficult of all to understand. It is the value that remains in your business after considering all of the amounts it owns, or is owed, and also all of the amounts it owes. The simplest way to think about Equity is that, were you to close your company today, it is the portion of your business that would remain for you after paying all of the people your business owes, and receiving money from all of the people that owe to your business.
So, next time you are preparing for a meeting to discuss your business, refresh yourself on these five terms. Hopefully that nodding will be a lot more assured, and you may feel confident to delve deeper into the numbers to understand how they affect you and your business and how you could do things differently towards achieving your goals.