Credit

Definition

Credit is an accounting entry that either decreases assets or increases liabilities and equity on the balance sheet. It represents funds a business owes to another party or revenue it has earned but not yet received.

5 Must Know Facts For Your Next Test

1. Credits are recorded on the right side of a T-account in double-entry bookkeeping.
2. In accrual accounting, revenues are credited when earned, regardless of when cash is received.
3. Credits decrease asset accounts and increase liability and equity accounts.
4. Accrued expenses involve crediting a liability account until payment is made.
5. A credit balance in revenue accounts indicates income earned by the company.

Review Questions

• Where are credits recorded in a T-account?
• How does a credit affect asset and liability accounts?
• What does a credit balance in revenue accounts signify?

Related terms

Debit:

An accounting entry that increases assets or expense accounts and decreases liabilities or equity.

Accrual Basis Accounting: An accounting method where revenues and expenses are recorded when they are earned or incurred, not necessarily when cash changes hands.

Liability: An obligation arising from past transactions that will result in the outflow of resources embodying economic benefits.