Definition
A credit is an entry on the right side of an account. Credits increase liability, equity and revenue accounts and decrease asset and expense accounts. Every journal entry has at least one credit, and the credits in an entry must add up to exactly the same amount as its debits.
How it works
Like a debit, a credit is a position rather than a judgement. Recording a sale credits revenue because revenue increases on the right; paying a supplier credits the bank because the asset goes down. A credit to an expense account reduces it, which is how refunds, rebates and reclassifications are recorded.
Credits explain where value came from. When a business receives cash, the debit to cash shows what it now has, and the credit shows why: a sale, a loan, a capital contribution or a customer settling an invoice.
A frequent error is crediting revenue for money that is not yet earned, such as a customer deposit. Under the accrual basis the deposit is credited to a liability (contract liability or customer advances) until the goods or service are delivered.
Example: a cash sale
A consultant invoices and immediately collects 2,500 for a project. Cash increases (debit) and service revenue increases (credit).
| Account | Debit | Credit |
|---|---|---|
| Bank | 2,500 | |
| Service revenue | 2,500 |