A credit entry is an accounting entry that increases the balance of certain accounts and decreases the balance of others.
Credit Entries in Double-Entry Bookkeeping
In a double-entry bookkeeping system, all transactions are recorded into an accounting journal. All transactions are posted to individual accounts. The accounting entries are made in accordance with the double-entry method of accounting, in which every accounting entry is posted to two or more accounts.
The terms debit and credit simply mean “left” and “right,” respectively. These terms are in reference to the columns in an accounting journal. Thus, debit entries are made on the left side and credit entries are made on the right side.
Rules of Debits and Credits
Credit entries are made in accordance with present rules of debits and credits. These rules state that credit entries increase certain accounts and decrease others. Likewise, debit entries increase certain accounts and decrease others.
The five account types used in an accounting system are:
According to the rules of debits and credits, credit entries increase liability, equity, and income accounts and decrease asset and expense accounts.
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Examples of a Credit Entry
For example, suppose a company borrows $100,000 from a bank. Because the loan is a liability, the entry to record the transaction requires a debit entry to a liability account. The entry increases the balance in the liability account.
Conversely, suppose a company makes a payment in cash. The cash account is an asset account and is reduced by a credit entry.
Why Credit Entries Matter
Credit entries are essential to maintaining balance in a double-entry accounting system. Every credit must be matched by a corresponding debit entry.
Properly applying credit rules ensures:
- Accurate financial records
- Balanced trial balances
- Reliable financial statements
Understanding credit entries is fundamental for analyzing financial statements and evaluating business performance.
