Definition of a Credit
In bookkeeping and accounting, a credit likely refers to the amount entered on the right side of a general ledger account or to the right side of a T-account.
A credit could also be a verb that means the act of recording an amount on the right side of an account. When an account balance is on the right side of an account, we say the account has a credit balance.
A credit entry in an asset account will reduce the account’s usual debit balance. A credit entry in a revenue, liability, or owner’s equity account will increase the account’s normal credit balance.
When a bank credits a company’s checking account, the bank’s liability account Customer Deposits is increased. However, the company must debit its Cash account to increase the company’s asset Cash.
Credit can also refer to loans, such as line of credit, letter of credit, credit rating, and so on.
Example of a Credit
Assume that a company uses $4,000 to purchase office equipment. Since the company’s Cash balance is decreased, the company will credit the account Cash for $4,000 and will debit the asset Office Equipment account for $4,000.
If a company issues a credit memo for $100 to one of its customers, the company will credit its current asset account Accounts Receivable for $100 and will debit a contra revenue account such as Sales Returns and Allowances.
