GLOSSARY

DEBTOR

30 October 2019 By PDSNET

An item on the balance sheet which shows the amount the company is owed, and which is to be paid over the short term. It is common for companies to allow their customers credit of 30 days, or sometimes more, for the purchases which they make. Under current assets, in the statement of financial position (in the balance sheet), the debtors figure (shown as accounts receivable) reflects how much the company was owed by it's customers at the end of the accounting period. In most cases, these amounts will be repaid within normal commercial periods of 30, 60 or 90 days. As a private investor, it is important to consider the effectiveness with which a company collects from its debtors. The debtors days outstanding ratio is used to measure this. The state of a company's working capital position is effected by the company's ability to collect from their debtors. This can also indicate as to whether the company has a strong management team or not. A company needs to find a balance between alienating their customers with strict collection conditions and collecting the money which is due. There are some businesses that collect their fees in advance, for example the education business, and so have very few or even no debtors. Other companies, like retail clothing and furniture companies, tend to offer extensive credit to customers to encourage them to buy more.

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