In the world of accounting and financial accounting, you regularly come across the terms debit and credit. While they may sound a bit old-fashioned, they are still the backbone of any financial accounting system. In this blog, we dive deeper into the concept of credit: what it means, how it works and why it is essential for healthy business operations.
What does “Credit” mean?
In accounting terms, the term refers to the right side of a general ledger account. It is opposed to debit, which represents the left side. Simply put:
- Credit means an increase in liabilities or equity, or a decrease in assets.
- Debit means an increase in assets, or a decrease in liabilities or equity.
For example: when a company sends an invoice to a customer, the turnover is booked on the credit side of the income statement. At the same time, the receivable from the customer is booked on the debit side of the balance sheet.
Examples of credit entries
Here are some common situations where a credit entry is made:
- Sell goods or services: Credit sales.
- Receive a loan: Credit the loan as a liability.
- Correction of an incorrect debit entry: Use this, for example, in the case of a return.
- Booking VAT on sales: Credit the VAT due.
Credit note: A special case
It is a document that corrects (in part or in full) a previous invoice. It is used when:
- A customer overpaid.
- There was an error in the original invoice.
- Goods returned or services not provided.
A note reduces the amount the customer has to pay and is recorded as negative revenue.
Why is it Important?
Correct application of entries is crucial for:
- Accurate financial reporting
- Understanding profitability
- Meeting tax obligations
- Preventing errors in administration
For companies working with automated invoicing and accounting software, such as TriFact365, it is important that the system processes entries correctly and links them to the correct documents and general ledger accounts.
Credit is more than an accounting term – it is an essential part of well-functioning financial records. Understand what it means and learn how it works. This will help you as a business owner, accountant or finance officer make better decisions and avoid mistakes.
