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.
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Credits are recorded on the right side of a T-account in double-entry bookkeeping.
In accrual accounting, revenues are credited when earned, regardless of when cash is received.
Credits decrease asset accounts and increase liability and equity accounts.
Accrued expenses involve crediting a liability account until payment is made.
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.