Definition of Credit (Accounting and Legal)

Credit in accounting is the side recorded on the right side of an account, which increases balances of liability, revenue, and equity accounts, and decreases balances of asset and expense accounts. From a legal perspective, a creditor is a natural or legal person to whom a financial obligation is owed by another party (debtor), whether this obligation arises from a contract, loan, or any other legal obligation.

The fundamental difference is that the accounting concept is technical related to recording entries, while the legal concept focuses on contractual relationships and claims between parties.

Difference Between Credit and Debit in Accounting

The difference between credit and debit in accounting lies in the two sides of accounts and their effect on balances. Credit is the right side of an account and increases balances of liabilities, revenues, and equity while decreasing balances of assets and expenses. In contrast, debit is the left side of an account and works in exactly the opposite way, increasing balances of assets and expenses while decreasing balances of liabilities, revenues, and equity.

The basic rule in accounting requires that the total credits equal the total debits in every accounting entry to ensure accounting balance.

Nature of Credit Accounts

Credit accounts by nature represent sources and origins of funds, including liabilities, revenues, and equity. These accounts increase with entries on the credit side and decrease with entries on the debit side. Credit accounts reflect where the company obtains its resources or what it earns from its business operations.

Simple Example

When receiving a bank loan for 50,000 SAR:

• Cash account (asset) becomes debited for 50,000 SAR
• Bank loan account (liability) becomes credited for 50,000 SAR