An Account Debtor is the individual or entity that owes money to a company under an accounts receivable arrangement. In simple terms, the account debtor is the customer who has purchased goods or services on credit and is obligated to pay the outstanding amount to the seller or service provider.

Key Aspects of an Account Debtor:

1. Role in Transactions:
   • In a credit sale, the seller (or creditor) delivers goods or services to the buyer (the account debtor) with the agreement that payment will be made at a later date. The account debtor is responsible for fulfilling this payment obligation within the agreed-upon terms.
2. Involvement in Factoring:
   • In factoring, a company sells its accounts receivable to a third party (the factor) at a discount to receive immediate cash. The account debtor then pays the factor directly instead of the original seller. The factor assumes the risk of collecting the debt from the account debtor.
3. Legal Obligations:
   • The account debtor is legally obligated to pay the amount owed according to the terms set forth in the sales agreement or invoice. Failure to do so can result in legal action, such as collections efforts or litigation.
4. Examples:
   • B2B Transactions: In a business-to-business (B2B) scenario, a retailer might be the account debtor to a wholesaler from whom they purchase inventory on credit.
   • Consumer Transactions: In a consumer context, an individual who buys furniture on a payment plan would be the account debtor to the furniture store.
5. Impact on Cash Flow:
   • The timely payment from account debtors is crucial for a company’s cash flow. Delayed payments can strain a company’s financial position, while prompt payments help maintain liquidity and operational stability.
6. Creditworthiness:
   • Companies often assess the creditworthiness of potential account debtors before extending credit. This evaluation helps mitigate the risk of non-payment and ensures that the account debtor is likely to meet their payment obligations.

In summary, an account debtor is the party that owes money to a seller or service provider for goods or services received on credit. The management of account debtors is essential for maintaining healthy cash flow and ensuring the financial stability of a business.