Credit (CR)

Definition

A credit (CR) in accounting pertains to an entry that either increases a liability or equity account or decreases an asset or expense account on the right side of an accounting ledger. Credits are a fundamental element of double-entry accounting, ensuring that every financial transaction balances its debits and credits.

In essence, for each financial transaction recorded, the total amount debited must equal the total amount credited, maintaining the accounting equation:
Assets = Liabilities + Equity

Examples

1. Sales Revenue: When a company sells goods, the Cash or Accounts Receivable account (an asset) is debited, and the Sales Revenue account (an equity increase) is credited.

   Example Entry:
   Cash / Accounts Receivable [DR]  $1,000
   Sales Revenue                  [CR]  $1,000
   

2. Loan Received: When a company takes out a loan, the Cash account (an asset) increases (debited), and the Loan Payable account (a liability) increases (credited).

   Example Entry:
   Cash                      [DR]  $5,000
   Loan Payable             [CR]  $5,000
   

3. Salary Expense: When a company pays salaries, the Salary Expense account (an expense) is debited, and Cash (an asset decrease) is credited.

   Example Entry:
   Salary Expense             [DR]  $2,000
   Cash                     [CR]  $2,000
   

Frequently Asked Questions

Q1: What is the primary role of a credit entry in accounting?
A1: A credit entry typically increases liabilities or equity, and decreases assets or expenses. It is recorded on the right-hand side of an account ledger.

Q2: How does a credit differ from a debit?
A2: A credit increases liabilities and equity or decreases assets and expenses, while a debit increases assets and expenses or decreases liabilities and equity.

Q3: Can a credit entry ever be negative?
A3: No, credit entries themselves are positive. However, they can offset debits to bring the balance of the account in line with the financial state.

Q4: How do credit entries affect financial statements?
A4: Credit entries can reduce the balances of certain accounts such as assets and expenses or increase the balances of liabilities and equity which reflect company financial health.

Q5: What happens if debits do not equal credits in a transaction?
A5: The accounting transaction would be unbalanced, indicating an error in the entries, as every transaction requires debits to equal credits.

Related Terms

1. Debit (DR): An entry on the left side of an accounting ledger, typically representing an increase in assets or expenses or a decrease in liabilities and equity.

2. Double-Entry Accounting: An accounting method where each transaction affects at least two accounts, with total debits always equaling total credits.

3. Journal Entry: The method of recording transactions in the accounting records by debiting and crediting relevant accounts.

4. General Ledger: A complete record of all financial transactions over the life of a company.

Online References

1. Investopedia: What is Credit (CR)?
2. Accounting Tools: Definition of a Credit
3. Wikipedia: Double-Entry Bookkeeping System

Suggested Books for Further Studies

1. “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
2. “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas
3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield

Fundamentals of Credit (CR): Accounting Basics Quiz

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