What is a credit?

Definition of a credit

A credit is an entry in your accounts that reduces what you own or increases your profit. It's the opposite of a debit entry.

How credits work in your accounts

There are five different kinds of nominal accounts in a business, and a credit affects each account differently.

• it increases a liability that your business owes, such as a bill from your supplier
• it increases income that your business is earning, such as an invoice you give to a customer
• it increases capital (or money) that the business owes back to its owner
• it reduces an asset that your business owns, like its cash
• it reduces a day-to-day running cost or expense of your business, like its accountancy fees

Every time you make a credit entry in a set of accounts, you must also make an equal and opposite debit at the same time.

How debits and credits work for different accounts

To increase the amount in your business accounts, you need to debit some accounts and credit others. What you do depends on the kind of account you’re dealing with:

• for an income account, you credit to increase it and debit to decrease it
• for an expense account, you debit to increase it, and credit to decrease it
• for an asset account, you debit to increase it and credit to decrease it
• for a liability account you credit to increase it and debit to decrease it
• for a capital account, you credit to increase it and debit to decrease it

Read more about double-entry bookkeeping ».

Example of a credit:

When you run your payroll, you have to pay some money to both HMRC and your staff. These are liabilities in your accounts, so they will be credit entries in your balance sheet. Remember, every credit must also have an equal and opposite debit. The cost of the staff salaries is a day-to-day running cost, so is debited to your profit and loss account as an expense.