PayTraq Blog

Counterparty in bookkeeping. Who are debtors and creditors? How to work with them?

Posted in PayTraq U, 101, accounting

Most of the business operations recorded in books require the indication of the other party of the transaction – counterparty.

Counterparty is a third party entering into any contractual relationships with your company. These relationships are somehow related to the company’s business activity, for example, services received or provided, goods purchased or sold, incurrence of financial commitments, payroll accounting, cash inflow or outflow, etc.

Based on the operation, a counterparty can be your customer, vendor, employee, bank, or tax agency.
Records are kept individually for each counterparty, for this reason, the counterparty shall be indicated in the accounting entries.

Separate counterparty accounting allows to find out at any time who owes you and how much they owe you, as well as whom and how much you owe, to reconcile payments with a counterparty at any date to confirm the amount due, and to get a counterparty’s account statement over any period of time.

Who are debtors and creditors?

Normally debtors are your customers, those who owe you money. Debtors are included into the company’s assets side of the balance sheet.
Creditors are those whom you owe. Usually, they are your vendors. Creditors are included into the liabilities side of the balance-sheet.

What are accounts receivable?

When a sales transaction comes through, the money not always arrives immediately to the bank account or to the company’s cash desk.

In the world of bookkeeping, accounts receivable are what can be described as the money expected to arrive. It’s the money to be legally paid to you for the services provided or goods sold. It is not cash or money deposited into your bank account you can use.
If you sold something to your client and didn't receive the money instantly, your client becomes your debtor. His debt in this case falls within the accounts receivable category, which is recoded in the related account.

Why are accounts receivable so important?

First of all, accounts receivable impact your money flow. Current assets influence business development directly. Accounts receivable are the money to be received, not available at the moment. At the same time, each sale itself implies certain direct expense resulting, in its turn, in cash outflow.
The longer such money payable remains in the "expected" list, the more difference will be between the cash inflow and outflow, hence the more chances that the working capital for business expansion will be reduced.
Accounts receivable can be represented as short-term loans you provide to your clients.
Meanwhile, you cover all expenses necessary for the continuous provision of your services or purchase of the goods you sold.
The faster the accounts receivable turnover is the better.
Your payment policy may include different terms and payment timelines. It depends on you, your customer, goods sold or services rendered, or industry standards. The longer the payment term is, the more money you loan to your customers, and on the contrary, the shorter the payment deadline is, the faster you can expect to get your money. Perfect terms and conditions should be well-balanced between your own interest and competitive ability of what you offer to your clients.

How to make your clients pay on time?

It's never fun to ask people to pay up. And as you must know, it's quite difficult to make people pay in time .
One of the ways to accelerate money collection is to provide most suitable payment options to your clients, for instance, a possibility to make an invoice payment online any time.
Automatic payment reminders can be very effective for overdue payments. Such reminders can be sent to a customer from time to time providing the customer again with an option to pay immediately.
Under most circumstances it makes sense also to give customers the benefit which can help motivate them to pay early or at least on time - such as extra discounts, free delivery, different bonuses and gifts within a loyalty program.
Such approach will help you not only increase the working capital, but also make your client come back to you next time.

What are accounts payable?

You've to spend money to make money and, at any given time, your business undoubtedly owes something to someone.

Accounts payable are the money you owe to your suppliers for the services received or goods purchased, for which you haven’t paid yet. Actually, it is the opposite of accounts receivable. Since you are the customer for your supplier, your accounts payable are accounts receivable for him.
Accounts payable are the expected money outflow, so they impact your money flow directly. However, as opposed to the accounts receivable, payment deadline postponing is more favorable you, thus keeping the necessary working capital for as long as possible, provided that you do not violate the terms and conditions established by the supplier.

Why is it important to manage accounts payable properly and pay on time?

Poor management of accounts payable may cost you additional money and destroy your reputation as well as falsify your financial planning. Missed or partial payments may result in late payments, supply terms tightening, penalty interests, or even loss of the vendor. Of course accidents can happen, and no one is impervious to payment delays. However, if it becomes a tendency, you have a big problem which in the longer term will affect your reputation, and you’ll be considered an unreliable business partner. Having an effective accounting system for keeping track of accounts payable is the best way to streamline the payment process in your company.