What is a Credit?

Definition: A credit in an accounting sense is part of the most fundamental concepts in accounting, representing a side of each individual transaction recorded in any accounting system.

A credit indicates that a transaction has occurred in which a liability or a gain was caused.

A credit transaction can be used to decrease a debit balance or increase a credit balance.

System of Notation

Credits and debits are essentially a system of notation used in bookkeeping in order to identify where and how to record any financial transaction.

With regards to bookkeeping, debits and credits are a replacement for addition and subtraction. Within double-entry bookkeeping, debits are used for expense and asset transactions, while credits are used for liability, gain, and equity transactions.

This means that expense and asset accounts increase on the debit side and decrease on the credit side, while liability, gain, and equity accounts increase on the credit side and decrease on the debit side.

Traditionally, the process of recording transactions take place in two columns; debits in the left hand column and credits in the right.

By being recorded in separate columns, it allows for the items to be recorded and totalled independently of each other, minimizing the risk of mistakes.

When the total value of the credits for an account is larger than the debit total, that account is said to have a credit balance. An account may have a debit balance or credit balance, but it cannot have both!

Origin of the term 'Credit'

The term credit has its roots set in the latin word 'creditum' meaning "that which is entrusted or loaned" which also came from 'credere' which means to "trust or entrust".

Debit and Credit Principle

Each transaction consists of debits and credits, and for every transaction they must be equal.