In accounting, credit is the right-hand side of a ledger account, opposite debit on the left. A credit entry usually means an increase in your liabilities or equity, or a decrease in your assets. In this article you can read what credit means, how it relates to debit, a worked example of a journal entry with both sides, and the mistakes that most often put an entry out of balance.
One thing to rule out first. This article is about credit in bookkeeping, the right-hand side of an account. It is not about credit as in a loan or a line of credit, and not about a credit score or a credit card. Those meanings share the word but have nothing to do with each other: a credit entry in your ledger says which side of the account a figure lands on, not whether anyone is lending you money.
Looking for something more specific? If you need the document that corrects an invoice, see what a credit note is or read how crediting an invoice works. And if you are after the party you owe money to, that is a creditor. Just want to see the two sides in a real entry? Go to the worked example.
Table of contents
What does credit mean in accounting?
Credit refers to the right-hand side of a ledger account. Whether a credit is good news or bad news depends entirely on which account it lands in, and that is the part people find counter-intuitive. A credit to a revenue account means you have earned something. A credit to your bank account in the ledger means money has left it. The word says nothing about gain or loss; it says which column the amount sits in. Every entry has a debit side and a credit side that are equal in total, a principle called double-entry bookkeeping.
Debit and credit side by side
| Debit (left) | Credit (right) | |
| Assets | increase | decrease |
| Liabilities | decrease | increase |
| Equity | decrease | increase |
| Revenue | decrease | increase |
| Expenses | increase | decrease |
Read the table by row rather than trying to memorise a rule. The same credit that increases a liability decreases an asset, so the account type decides the effect. If you can place an account in one of these five categories, you can work out what a credit does to it without looking anything up.
A worked example: one sale, three entries
Suppose you invoice a customer 1,000 euro excluding VAT, with 21% VAT on top. The invoice total is 1,210 euro. That single sale produces one debit and two credits:
| Account | Debit | Credit |
| Trade receivables | € 1,210 | |
| Revenue | € 1,000 | |
| VAT payable | € 210 | |
| Total | € 1,210 | € 1,210 |
Both sides come to 1,210 euro, so the entry balances. Notice what the two credits are doing: the credit to revenue records what you earned, and the credit to VAT payable records what you now owe the tax authority. Same side of the ledger, two entirely different meanings. And when the customer pays, you make the mirror entry: debit the bank account, credit trade receivables, because the receivable disappears.
Common credit entries
- Selling goods or services: credit the revenue account.
- Taking out a loan: credit the loan account, because your liability increases.
- Charging VAT on a sale: credit the VAT payable account.
- Correcting an incorrect debit entry: for instance on a return.
- Receiving payment from a customer: credit trade receivables, since the amount owed to you falls.
The credit note: a special case
A credit note is a document that corrects an earlier invoice, in part or in full. You use one when:
- a customer has paid too much;
- there was an error in the original invoice;
- goods have been returned or services were not delivered.
A credit note lowers the amount the customer has to pay and is booked as negative revenue. Worth keeping apart: a credit note is a document, while a credit is a side of an account. A credit note produces credit entries, but not every credit entry comes from a credit note. Read more about how crediting works.
Four common mistakes with credit
- Reading credit as “money coming in”. A credit to your bank account in the ledger means money going out. The side of the account, not the direction of the cash, is what the word describes.
- Booking the gross amount as revenue. On a sale with VAT, the revenue credit is the net amount and the VAT is a separate credit. Put the full 1,210 in revenue and your VAT return will not reconcile.
- Confusing a credit note with a credit entry. The first is a document you send; the second is where an amount lands in the ledger.
- Correcting by reversing the sign instead of the side. A wrong entry is put right with a proper counter-entry on the other side, so both remain traceable, rather than by editing the original.
Automating credit entries with TriFact365
In automated invoice processing, what matters is that debit and credit entries land on the right ledger accounts. TriFact365 recognises your purchase invoices and credit notes automatically and prepares a booking proposal, including the right debit and credit lines, in your own TriFact365 portal. After your check and approval the entry goes to your accounting package. That takes out the retyping errors and keeps your records in balance, including the split between net amount and VAT that the second mistake above turns on. See how processing incoming invoices works.
Frequently asked questions about credit
Credit is the right-hand side of a ledger account, opposite debit on the left. A credit entry generally means an increase in liabilities or equity, or a decrease in assets.
Debit is the left side and increases assets or expenses. Credit is the right side and increases liabilities, equity and revenue. Every entry has a debit and a credit side of equal total.
Invoice 1,000 euro plus 21% VAT and you debit trade receivables 1,210, credit revenue 1,000 and credit VAT payable 210. Both sides total 1,210, so the entry balances.
No, and this is the most common misreading. A credit to your bank account in the ledger means money leaving it. The word describes which side of the account an amount lands on, not the direction of the cash.
No. In bookkeeping, credit is a side of a ledger account. Credit in the sense of a loan or a credit facility is a different meaning of the same word and has nothing to do with which column an amount sits in.
A credit note corrects an earlier invoice, for example after an error, an overpayment or a return. The amount is booked as negative revenue. The note is a document; a credit is a side of an account.
TriFact365 recognises purchase invoices and credit notes and prepares a booking proposal with the correct debit and credit lines, including the split between net amount and VAT. After your check the entry goes to your accounting package.
In closing
Credit is more than a piece of bookkeeping vocabulary; it is one half of every entry you make. Once you stop reading it as “money in” and start reading it as “the right-hand side of this particular account”, the rest follows: the table tells you the effect, and the worked example shows both sides adding up. That is what keeps your records in balance and your VAT return reconciled.
