When it comes to banking, many consumers are still unclear of the definition of credit.
A credit in banking is an entry or log that increases a certain liability or obligation you have or increases an equity account holding. An example if this would be an auto loan. A credit can also be used to describe a decrease in an asset or an expense-related account.
Credit in Banking Definition
Anytime an accounting-based transaction occurs, two accounts will always become impacted. One of the accounts will receive a credit while the other receives a debit. There can be more than two accounts affected, but always a minimum of two accounts that receive either a debit or a credit entry.
Depending on the type of account, the definition of credit may change.
Asset accounts, such as a savings account or a mutual fund, will experience a decrease in their balance when a credit is applied. With an equity account, such as a ownership stake, a credit will increase your total balance. Lastly, with a liability account, such as accounts payable, a credit will increase the balance or liability.
All organizations have different accounting methodologies, but all rely on one proven equation, which is:
Assets = Liabilities + Owners Equity
This equation is used to ensure that all credit and debit related entries are recorded correctly, as each credit will have a corresponding debit attached to it. As a rule of thumb, debits always go onto the left side of the column while a credit always goes to the right side. There are no exceptions to this accounting law.
In most business transactions, you will only have an asset if you used a liability or equity to pay for it. This is reflected in the debit and credit portion of a balance sheet.
All in all, a credit in banking increases a liability or obligation you or your business has. It can also be used to describe an increase in an equity account or equity stakeholding. Depending on the type of account, a credit can have a variable impact.
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