Imagine a small manufacturing company called ABC Furniture Co. that produces custom-made furniture. ABC Furniture Co. sources its raw materials, such as wood, upholstery, and hardware, from different suppliers on credit terms. The following is the journal entry for Sundry Debtors that needs to be recorded to show the credit sale of goods or services. Accounts (Trade) Payable arises due to purchases being made on credit.

1. For instance, the liquidity positions of companies X and Y are shown below.
2. Once you’ve got the hang of it you can concentrate on growing the business and conducting more business on credit to increase your inventory.
3. Commercial paper is also a short-term debt instrument issued by a company.
4. All such parties from whom the goods are bought on credit come under sundry creditors or accounts payable, which is another term used for a sundry creditor.
5. You can get an overview of the amount and the creditors to whom you owe money and how much you owe each creditor and the duration of such pending payments.
6. The current ratio relates the current assets of the business to its current liabilities.

Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. The prevailing view of what constitutes a “good” ratio has been changing in recent years, as more companies have looked to the future rather than just the current moment. Some lenders and investors have been looking for a 2-3 ratio, while others have said 1 to 1 is good enough.

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It all depends on what you’re trying to achieve as a business owner or investor. The current ratio can be expressed in any of the following three ways, but the most popular approach is to express it as a number. By contrast, in the case of Company Y, 75% of the current assets are made up of these two liquid resources.

Sundry Debtors are customers (individuals) or entities who owe money to a business for goods or services purchased on credit. Sundry creditors are considered as liabilities to a business as they are supposed to pay outstanding amount, for a specific transaction, based on the agreed timeline by both the parties. Let us consider an example to understand the transaction process of sundry creditors accurately. A high current ratio is not beneficial to the interest of shareholders. This is because it could mean that the company maintains an excessive cash balance or has over-invested in receivables and inventories.

Conversely, any transactions that diminish the creditors’ balance, such as payments to creditors or purchase returns, are recorded as debits. Let us dive deeper into the article to understand what sundry debtors are, how it is recorded in different financial statements and why they are important for a business. The current ratio is an evaluation of a company’s short-term liquidity. In simplest terms, it measures the amount of cash available relative to its liabilities. The first way to express the current ratio is to express it as a proportion (i.e., current liabilities to current assets). Even from the point of view of creditors, a high current ratio is not necessarily a safeguard against non-payment of debts.

Current Ratio

This ratio was designed to assist decision-makers when determining a firm’s ability to pay its current liabilities from its current assets. Cash flow is the liquid cash available at any point of time during business practices. The dividends declared by a company’s board of directors that have yet to be paid out to shareholders get recorded as current liabilities.

Accrued Expenses

All credit purchases made during the year should be credited to the Creditors Account, showing an increase in the creditors’ balance. On the other hand, all transactions such as payment to a creditor, purchase returns, etc. that reduces the creditors’ balance should be debited. A low current ratio may indicate the company is not able to cover its current liabilities without having to sell its investments or delay payment on its own debts. If the current ratio of a business is 1 or more, it means it has more current assets than current liabilities (i.e., positive working capital).

Ledger Account

Over-trading companies are likely to face substantial difficulties in meeting their day-to-day obligations. Hence, Company Y’s ability to meet its current obligations can in no way be considered worse than X’s. Bills Payable (B/P) sundry creditors is current liabilities is a bill of exchange accepted by a business the amount for which will be payable on the specific date mentioned in the bill. Bills Receivable (B/R) is a bill of exchange accepted by a debtor or is received in way of an endorsement from them.

Akin sundry creditors, where you owe money to other businesses, sundry debtors are those businesses who owe you money for the products they purchased from you. Sundry Debtors are an asset to your business as money will enter the business. They are hence mentioned on the left-hand side of the balance sheet under Assets.

Some common balance sheet ratios include the debt-to-equity ratio, the current ratio, the acid-test ratio, and the inventory turnover ratio. In short, a company needs to generate enough revenue and cash in the short term to cover its current liabilities. As a result, many financial ratios use current liabilities in their calculations to determine how well or how long a company is paying them down. Recording sundry creditors in accounting involves creating entries to reflect the amounts owed by a business to its various creditors.

Debit the relevant expense or asset account (e.g., purchases or inventory) to reflect the increase in the company’s assets or expenses. To decrease liabilities, negotiate early payment reductions with suppliers, settle overdue invoices, or contest and resolve disputes. If you intend to limit earnings, you can increase the number of creditors by delaying payments or incurring more costs. The term ‘Creditor’ refers to a person or entity to that you owe money for goods or services purchased on credit. Some businesses supply products and services to other businesses on credit basis.