What is a credit?

Definition

A credit is the amount recorded on the right side of a journal entry. That right-hand amount increases liabilities, equity, and revenue, and it decreases assets and expenses.

In the books, the credit is how you take an asset off the ledger, record a new obligation, or recognize earnings. The left side of the same entry always totals the same dollar amount so the posting stays in balance.

Where it shows up

Balance sheet: Related to liability and equity increases, and asset decreases.

P&L: Related to revenue increases.

Cash flow: Related to cash only if the credit is to cash.

See also: Debit · Journal Entry · Double-Entry Bookkeeping

When you open the Balance Sheet, a credit often sits behind a higher liability or equity line. It also sits behind a lower asset line, such as accounts receivable after a customer pays.

A credit to cash or receivables lowers current assets. A credit to accounts payable or another short-term obligation raises current liabilities.

On the Income Statement, a credit to revenue raises sales for the period. The credit records the earning even when cash has not arrived yet.

Cash flow moves only when the credit lands on cash. Crediting cash records money leaving the business, not money coming in.

How it works

Account type decides what a credit does. Credit an asset and the asset balance falls.

Credit an expense and the expense balance falls. Credit a liability, equity, or revenue account and that balance rises.

• Credit an asset or an expense, and that balance falls.
• Credit a liability, equity, or revenue account, and that balance rises.
• Match the credit with an equal debit total in the same dated record.
• Post the credit into the general ledger so the account's running balance includes it.

The chart of accounts is the list that tells you which type each account is. Cash, inventory, and receivables are assets, so a credit reduces them.

Loans, payables, and accrued wages are liabilities, so a credit increases them. Owner equity and sales accounts also rise when they are credited.

A credit never posts by itself. Double-entry bookkeeping requires an equal total on the left in the same dated record.

Posting writes the credit into the general ledger account. After posting, the account's running balance already includes that right-hand amount.

When a customer settles an invoice, the credit belongs on accounts receivable. The receivable is an asset, so the credit takes it off the books.

When you bill a customer for work already done, the credit belongs on revenue. That credit is the earning, not the collection.

When you buy on account, the credit belongs on accounts payable. The credit records what you now owe the vendor.

The same right-hand rule applies at period end. Unpaid wages still get a credit to a liability because the obligation exists even though payday has not arrived.

Example

A florist collects $400 on a cafe invoice. Cash comes in, and the florist credits accounts receivable $400 so that receivable leaves the books.

Debit: Cash $400

Credit: Accounts receivable $400

The $400 credit reduces accounts receivable. Cash rises on the other side, and the Balance Sheet still balances.

That credit does not record new sales. The original invoice already credited revenue when the flowers were delivered.

The florist is not reversing a sale. The credit simply clears the asset that the unpaid invoice created.

Common mix-ups

A credit is not a bank deposit by default. A bank statement "credit" means money arrived in the account; in the books, a credit to cash means cash went out.

A credit is not the left side of the entry. The left side increases assets and expenses; the credit is the right side and does the opposite for those two account types.

A credit to revenue is not a cash collection. Revenue is credited when it is earned; the later collection credits accounts receivable, not revenue again.

Related terms

• Debit: The left side of an entry, which increases assets and expenses.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Double-Entry Bookkeeping: The method in which every transaction hits at least two accounts and stays in balance.
• Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
• General Ledger: The master record of every account and every posted transaction.
• Posting: Recording a journal entry into the general ledger accounts.
• Chart Of Accounts: The organized list of every account used to record transactions.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.