Are creditors assets or liabilities?

Liabilities. Creditors are amounts the business owes, so they sit on the liabilities side of the balance sheet, usually split between those due within one year and those due later. Long-term loans appear separately from amounts due within a year.

Yes. Unpaid VAT, PAYE, National Insurance and Corporation Tax are all amounts owed to HMRC and appear within creditors. In an insolvency, HMRC is now a secondary preferential creditor for some taxes. That means it ranks ahead of ordinary unsecured creditors for VAT and PAYE debts.

What are creditors?

Creditors are the people and organisations a business owes money to, such as suppliers, HMRC, banks and lenders, shown as liabilities on the balance sheet.

What creditors means

A creditor is anyone your business owes. In UK accounts, liabilities are often labelled "creditors" and split into two headings:

Creditors: amounts falling due within one year, such as supplier invoices, VAT, PAYE, Corporation Tax, credit cards, overdrafts and accruals
Creditors: amounts falling due after more than one year, such as the long-term part of a bank loan or hire purchase

Day to day, "trade creditors" means suppliers you buy from on credit. In software such as Xero and QuickBooks this list is called accounts payable or bills.

Example

A restaurant's creditors at its year end:

Creditor	Amount
Food and drink suppliers	£11,300
VAT due for the quarter	£9,400
PAYE and pension for March	£6,750
Corporation Tax	£5,200
Accrued electricity and gas	£1,850
Creditors due within one year	£34,500

If the restaurant pays its suppliers in 30 days on average and buys £135,000 of food and drink a year, around £11,000 of supplier invoices will be outstanding at any time.

Why it matters for your business

Paying suppliers on credit is free short-term finance, but only if you stay within terms. Stretching creditors to protect cash damages relationships and can lead to stop-supply or late-payment interest. Paying too early leaves you short.

A useful measure is creditor days: trade creditors ÷ purchases × 365. Compare it with debtor days; if customers take 60 days to pay you while you pay suppliers in 30, you are financing the gap from your own cash. That is a working capital problem, common in growing businesses.

Creditors vs debtors

Creditors are people you owe. Debtors are people who owe you. A simple way to remember: a creditor has given you credit.

Keeping creditors under control

Enter supplier bills as they arrive, not when you pay them, so your accounts show what you really owe. Schedule payments to match terms, and review an aged creditors report monthly. Set aside VAT and PAYE as soon as they are collected: they are the creditors with the strongest powers if paid late.

Suppliers may also ask to see your filed accounts before giving credit, and credit agencies score businesses partly on how quickly they pay.

Common questions

Liabilities. Creditors are amounts the business owes, so they sit on the liabilities side of the balance sheet, usually split between those due within one year and those due later. Long-term loans appear separately from amounts due within a year.

More accounts & bookkeeping terms

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