Credit

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The term 'credit' has a number of different related meanings in finance generally, and in banking in particular.

We will consider them separately in the sections below.



Repayable financial benefits

The provision or availability of loans or other repayable financial benefits by a bank or other lender.

An entity which lends money, or which provides goods or services on deferred payment terms, is 'extending credit' to its customer.


Credit includes borrowings, especially short term ones relating to particular goods or services.


Creditworthiness

Credit strength, or 'creditworthiness', means an entity's ability and willingness to meet its financial obligations.


Banking

Credit balances in banking

In relation to a bank account, a credit balance in the bank's books is one which stands in favour of the customer.

The bank owes money to the customer.

(Contrasted with a debit, or overdrawn, balance.)

Credit items in banking

In banking, a 'credit' also means an item paid into a bank account.


Book-keeping

In double entry book-keeping, every accounting transaction is recorded with both a Debit entry and a Credit entry in the accounting records.

Credit balances in book-keeping

Credit balances represent liabilities or income.

(Debit balances represent assets or expenses.)


Credit entries in book-keeping

In double entry book-keeping a 'credit entry' is one made:

  • To increase a credit balance; or
  • To reduce a debit balance.


For example, the book-keeping entry to recognise an expense paid in cash is:

DR Expense

CR Bank

If the bank balance is already overdrawn, the CR Bank accounting entry for the payment will increase the overdrawn bank balance (liability) in the balance sheet.

But if the bank balance is currently an asset (DR balance in the account holder's records), the CR Bank accounting entry for the payment will reduce the positive bank balance (asset) in the balance sheet.


Taxation

  1. A 'tax credit' is an amount which can be used to reduce a tax liability.
  2. Under the UK tax loan relationship rules, a 'credit' is any profit or gain, for example interest income, arising from a loan relationship.


Non-repayable financial benefits

A 'credit' can also mean any amount in favour the holder of the credit, entitling them either to future goods or services without further payment (or for a reduced payment) or alternatively to a repayment in cash.


See also