Credit

Credit Definition

In bookkeeping, a credit is an entry on the right side of a journal entry or T-account that increases certain types of accounts and decreases others. Credits increase liabilities, equity, and revenue accounts. They decrease asset and expense accounts. Every transaction requires at least one credit and one debit, and total credits must equal total debits.

Credit in Practice — Example

Your consulting firm receives a $5,000 payment from a client. You record: Debit (left side) Cash $5,000, Credit (right side) Consulting Revenue $5,000. The credit increases your revenue account. Later, you pay $1,200 for office rent. You record: Debit Rent Expense $1,200, Credit Cash $1,200. The credit decreases your cash account. In both cases, the credit affects the account's balance according to its type.

Why Credit Matters for Your Books

Understanding credits is fundamental to double-entry bookkeeping — the system that keeps financial records accurate and balanced. Without grasping credits and debits, you can't understand how transactions affect your financial statements or catch errors in your books.

The credit side reveals the source of funds or the nature of the transaction. When you see a credit to Revenue, you know income was earned. A credit to Accounts Payable means you incurred a liability. A credit to Cash means money went out. Reading credits tells you what happened financially.

Many bookkeeping errors stem from putting credits and debits on the wrong side. Understanding which account types increase with credits (liabilities, equity, revenue) versus debits (assets, expenses) prevents these mistakes and helps you troubleshoot when accounts don't balance.

How Credit Shows Up in QuickBooks

In QBO, credits happen automatically when you record transactions through forms — customer payments credit Revenue, bill entries credit Accounts Payable, and so on. In journal entries, credits appear in the "Credits" column on the right side. QBO won't save an unbalanced entry where credits don't equal debits. View credits in the Account Register where they show as positive amounts for liability/equity/revenue accounts and negative amounts for asset/expense accounts.

Common Mistakes

Mixing up credits and debits. Remember DEALER: Debits increase Expenses, Assets, Losses; Credits increase Equity, Liabilities, Revenues. If this confuses you, focus on whether the account balance should go up or down.

Thinking credits are always positive. On your bank statement, credits mean money in. In bookkeeping, credits can increase or decrease balances depending on account type. A credit to Cash (an asset) decreases it.

Not ensuring credits equal debits. Every transaction must balance. If you're making manual journal entries, double-check that total credits equal total debits before saving.

FAQ

Q: Why do credits increase revenue but decrease assets? A: It's the fundamental structure of double-entry bookkeeping. The accounting equation (Assets = Liabilities + Equity) requires this balance. When revenue is earned (equity increases), something else must change — usually cash increases or a receivable is created.

Q: Is a credit balance good or bad? A: It depends on the account type. Credit balances are normal for liabilities, equity, and revenue accounts. Credit balances are unusual (and potentially problematic) for asset and expense accounts.

Related Terms

Debit

Double Entry

Compound Entry

Balance Sheet

Chart of Accounts

> Need help making sense of your books? Ketchup cleans up your QuickBooks in 3–7 business days. Get your price →