What is Credit?
Credit is a broad term with many different meanings in the financial world. In general, it is defined as a contractual contract in which a borrower now receives something of value and the lender agrees to pay at a later date – usually interest.
Credit also refers to the credit reputation or credit history of an individual or company. It also means an accounting entry that reduces assets on a company’s balance sheet or increases liabilities and equity.
In the first and most general definition of the term, the credit refers to a contract for the purchase of goods or services, along with a straightforward payable. This is known as credit purchase.
The most common form of credit purchase is with credit cards. People may not have enough cash to buy because they tend to shop by credit card. Accepting credit cards can help increase sales in retailers or between businesses.
Credit or credibility of a consumer or business can be called a loan. For example, one might say, “He has a large loan, so he’s not worried that the bank has rejected his mortgage application.”
In other cases, it means a reduction in the amount owed. For example, imagine that someone owes $ 1000 to the credit card company, but makes a $ 300 purchase to the store. He takes a loan from his account and then owes it only $ 700.
[Important: A service credit is an agreement between a consumer and a service provider, such as a utility, mobile phone, or cable service.]
Finally, credit is an input shown in accounting to increase asset or reduce liability. Thus, a loan increases the net income in the company’s income statement, while the debt decreases the net income.