6.1 Claims Against the Assets

Question 1

What is a Creditor?

Answer 1

A creditor is a person or organization that lends money or goods to a person or business.
If you lend your sweater to your sibling, you are a creditor.
The most common creditors for a business include:
Banks - lending money for business operations / mortgages
Suppliers - provides goods/ services with promise of payment at a later date
Credit Cards - Short term loans

Question 2

What is a Debtor?

Answer 2

A debtor is a person or organization that owes money (is in debt) to another person or organization.
The Debtor owes money to the Creditor.
Debtor = Borrower
Creditor = Lender
Often customers will be debtor to the business if they haven’t fully paid for the product

Question 3

Who gets paid first?

Answer 3

Creditors, ALWAYS…. But why?
The COST Principle.
Assets are listed at their purchase value, not their current value
It’s hard to value used goods.
When you sell everything you likely won’t get the value listed on your balance sheet

Question 4

Accounting entries are made from

Answer 4

business papers known as source documents.

Question 5

Source documents are kept on file for

Answer 5

reference purposes and are proof of transactions.