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Credit in Accounting Meaning
In accounting, “credit” refers to an entry on the right side of a financial account. It is a fundamental concept in double-entry bookkeeping, a system that ensures that for every debit entry made, there is an equal and corresponding credit entry. This system is based on the accounting equation:
Assets = Liabilities + Equity.
Here are key aspects of “credit” in accounting:
- Double-Entry Bookkeeping:
- Double-entry bookkeeping is a foundational accounting principle. For every financial transaction, there are at least two accounts involved: one account is debited, and another is credited. The total debits must equal the total credits.
- Credit Side of an Account:
- When a credit entry is made, it signifies an increase in liability accounts and equity accounts, and a decrease in asset accounts. On the other hand, in revenue and expense accounts, a credit entry represents a decrease.
- Account Balances:
- The balance of an account is determined by the total of its debit and credit entries. Depending on the type of account, a positive balance may indicate a credit balance (for liability and equity accounts) or a debit balance (for asset accounts).
- Normal Balance:
- The normal balance for liability and equity accounts is on the credit side. This means that to increase the balance of these accounts, you would credit them. Conversely, to decrease their balance, you would debit them.
Examples of Credit Entries:
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- Liability Accounts: Credits increase liabilities. For example, when a business takes out a loan, the liability account for the loan is credited.
- Equity Accounts: Credits increase equity. For instance, when a business owner invests additional capital into the business, the equity account is credited.
- Revenue Accounts: Credits decrease revenue. In cases of sales returns or refunds, the revenue account is credited.
- Expense Accounts: Credits decrease expenses. If an accrued expense is paid, the expense account is credited.
What Is a Credit Limit?
A credit limit is the maximum amount of credit or borrowing that a financial institution, such as a credit card issuer or a lender, is willing to extend to a borrower. It represents the cap on the amount of money a borrower can access or spend within a specified period without exceeding the approved credit amount.
What Is a Line of Credit?
A line of credit (LOC) is a flexible borrowing arrangement that allows individuals or businesses to access funds on an as-needed basis, up to a predetermined credit limit. It is a form of revolving credit, meaning that as the borrower repays the borrowed amount, the available credit is replenished, allowing for ongoing access to funds.
Debit vs. Credit in Accounting
In accounting, the concepts of debit and credit form the backbone of the double-entry bookkeeping system, ensuring accurate and balanced financial records. Each financial transaction involves both a debit entry and a credit entry, impacting various types of accounts in specific ways.
Asset Accounts:
- Debit (+): Increases the asset balance.
- Credit (-): Decreases the asset balance.
- Effect on Balance: Normal balance is a debit.
Liability Accounts:
- Debit (+): Decreases the liability balance.
- Credit (-): Increases the liability balance.
- Effect on Balance: Normal balance is a credit.
Equity Accounts:
- Debit (+): Decreases the equity balance.
- Credit (-): Increases the equity balance.
- Effect on Balance: Normal balance is a credit.
Revenue Accounts:
- Debit (+): Decreases the revenue balance.
- Credit (-): Increases the revenue balance.
- Effect on Balance: Normal balance is a credit.
Expense Accounts:
- Debit (+): Increases the expense balance.
- Credit (-): Decreases the expense balance.
- Effect on Balance: Normal balance is a debit.
Account Type | Debit (+) | Credit (-) |
---|---|---|
Asset Accounts | Increases | Decreases |
Liability Accounts | Decreases | Increases |
Equity Accounts | Decreases | Increases |
Revenue Accounts | Decreases | Increases |
Expense Accounts | Increases | Decreases |
Understanding the role of “credit” in accounting is crucial for maintaining accurate financial records and ensuring the equality of debits and credits in the double-entry system. It provides a systematic way to record and track financial transactions, contributing to the overall accuracy and reliability of financial statements.