Introduction to Creditors
Creditors are amounts which are owed by you to your suppliers, they are sometimes referred to as accounts payable or trade creditors.
If your supplier allows you credit and invoices you for a product or service and you make payment at a later date 30 days 60 days etc, then while you owe the supplier the money they are classified as a creditor of your business.
A creditor is recorded in the balance sheet of the business under the heading current liabilities, that means they are payable within a year.
How do you Record Creditors?
A trade creditor is normally first recorded in the purchase ledger which contains a personal account for each supplier. In this way a listing of the purchase ledger accounts will give you a listing of outstanding debts or creditors.
If for example, purchases are made on credit from Supplier A for 200 and Supplier B for 400 the first entry would be to the purchases day book to record the purchases.
The next entry would be to the purchase ledger to record the creditor to the personal accounts of each supplier.
Finally the double entry posting would be the total from the purchases day book and the purchase ledger.
The normal balance for a creditor account is a credit balance. Additional invoices added to the creditor control account will increase the credit balance, and payments to suppliers will reduce the balance. In addition there will be adjustments relating to discounts taken, error corrections, supplier debit notes for returned goods etc. and each of these will affect the balance on the account.
The creditor balance formula reconciles the beginning and ending balances on the creditors control account.
At the end of each accounting period, the ending balance on each supplier account can be reconciled to the independent statement received from the supplier. This statement shows the balance the supplier thinks is outstanding and, if the ending balance on the supplier creditors account does not agrees to the statement, then the purchases, payments, and adjustments each need to be checked to understand why, and appropriate correcting entries made.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.