In the context of Accounts Receivable, who are debtors and what role do they play?

Introduction / Context:
In accounting terminology, the word debtor is closely linked to Accounts Receivable. When a business sells goods or services on credit, it creates a legal right to receive cash from the customer at a later date. That customer becomes a debtor of the business. Understanding who debtors are and how they relate to Accounts Receivable is fundamental for anyone studying basic accounting or working with AR processes.

Given Data / Assumptions:

• The business sells goods or services both for cash and on credit.
• Credit sales create receivables, which are amounts due from customers.
• These customers are called debtors in traditional accounting language.
• Debtors appear as assets on the balance sheet because they represent future cash inflows.

Concept / Approach:
A debtor is a person or entity that owes money to the business. In Accounts Receivable, debtors are typically trade customers who have received goods or services on credit terms. The total of all individual debtor balances forms the Accounts Receivable balance in the general ledger. As customers pay, their debtor balances decrease and cash or bank balances increase. Distinguishing debtors from creditors (suppliers to whom the business owes money) is crucial for understanding working capital and trade relationships.

Step-by-Step Solution:
Step 1: Recall that a credit sale to a customer leads to a receivable, and that customer owes the business the invoiced amount. Step 2: Recognise that such customers are referred to as debtors, because they are in debt to the business until payment is made. Step 3: Evaluate option a, which defines debtors as customers who purchased on credit and owe money to the business, forming Accounts Receivable. This matches the concept. Step 4: Evaluate option b: owners of the business provide capital; they are not debtors in this sense unless they personally owe money under separate transactions. Step 5: Evaluate option c: suppliers from whom the business purchases on credit are creditors, not debtors. Step 6: Evaluate option d: government authorities who collect taxes from the business are also not debtors; they are recipients of tax payments. Step 7: Conclude that option a correctly describes debtors in the context of Accounts Receivable.

Verification / Alternative check:
Consider a simple example: the business sells goods worth Rs 50,000 on 30 day credit to Customer X. At the time of sale, the entry is: Debit Accounts Receivable (Customer X) 50,000 Credit Sales 50,000 Customer X is now a debtor owing Rs 50,000. When X pays, the company records: Debit Cash/Bank 50,000 Credit Accounts Receivable (Customer X) 50,000 After payment, the debtor balance is cleared. This example shows how debtors are directly linked to Accounts Receivable.

Why Other Options Are Wrong:
Option b incorrectly identifies owners as debtors; while owners may have invested money (making them providers of equity), they do not normally owe the business money due to credit purchases. Option c confuses debtors with creditors; suppliers from whom the business buys on credit are trade creditors. Option d misclassifies government authorities that collect taxes; these are external parties to whom the business must pay obligations, not debtors who owe money to the business.

Common Pitfalls:
A common confusion is between debtor and creditor terminology, particularly when switching perspectives. From the business's point of view, customers who owe money are debtors, and suppliers owed money by the business are creditors. From the supplier's point of view, the relationship is reversed. Another pitfall is forgetting that debtors are assets, not liabilities, in the business's books, because they represent future economic benefits in the form of cash receipts.

Final Answer:
In Accounts Receivable, debtors are customers who have purchased goods or services on credit and owe money to the business, forming the balance of Accounts Receivable.