What is a Credit?

//What is a Credit?
What is a Credit? 2017-10-02T07:53:45+00:00

Definition: A credit, sometimes abbreviated CR, is an accounting term for an entry made on the right side of an account; whereas, a debit refers to an entry on the left side of an account. The modern double entry accounting system is based on the concept that the total credits in the system must always equal the total debits.

What Does a Credit Mean in Accounting?

Many people get confused about the true meaning of a credit. It doesn’t mean an increase or decrease in an account. Lots of entry-level accounting students make this mistake. A credit actually means an entry on the right side of an account. Depending on the account, a credit could be an increase or decrease for the account. For example, a credit always increases accounts with a credit balance like liabilities, revenue, and equity accounts. This means that a credit recorded in a liability account would increase the liability account.

Conversely, asset and expense accounts have debit or left balances. A credit recorded in an asset account would decrease the asset balance. This is true about any account with a debit balance.

Example

Let’s take a look at the T-account of this long-term liability account. As we said earlier, a liability has a credit balance. This means that all credit increase the balance in the account. This T-account has one credit for $100,000 and one debit for $500 leaving it with a carrying balance of $99,500. In other words, the company owes $99,500 to its creditor.

Now let’s assume that the company took out an additional loan for $30,000. The journal entry to record this transaction would debit cash and credit the long-term liabilities account for $30,000. Now the total credits would be $130,000 and the debits would be $500 leaving the account with a $129,500 credit balance at the end of the period.