credit

Examples of credit in the following topics:

• Debits and Credits

  • Everything on the left side (debit side) increases with a debit and has a normal debit balance; everything on the right side (credit side) increases with a credit and has a normal credit balance.
  • Revenue is treated like capital, which is an owner's equity account, and owner's equity is increased with a credit, and has a normal credit balance.
  • What is debited and credited is also a matter of transaction type.
  • Real account: Debit what comes in and credit what goes out
  • Define how the terms debit and credit are used in accounting

• Using the Receivables Turnover Ratio

  • The receivables turnover ratio, also called the debtor's turnover ratio, is an accounting measure used to measure how effective a company is in extending credit as well as collecting debts.
  • A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient; in contrast, a low ratio implies the company is not making the timely collection of credit.
  • $\dfrac{\text{Trade receivables}}{\text{Credit sales} \cdot 365} = \text{Average collection period in days}$
  • $\dfrac{\text{Trade payables}}{\text{Credit purchases} \cdot 365} = \text{Average payment period in days}$

• Accounting for Sale of Stock

  • Credit additonal paid in capital (to account for the difference between par value and sell value)
  • Credit additional paid in capital (the difference between sale price and purchase price)

• Analyzing Long-Term Liabilities

  • Analyzing long-term liabilities combines debt ratio analysis, credit analysis and market analysis to assess a company's financial strength.
  • Standard & Poor's is a credit rating agency that issues credit ratings for the debt of public and private companies.
  • Please consult the figure as an example of Standard & Poor's credit ratings issued for debt issued by governments all over the world.
  • In addition to credit rating agencies such as Standard & Poor's, analysts can use debt ratios to help benchmark a company to it's industry peers.
  • There is more to analyzing long-term liabilities than simply reading a company's credit rating and performing independent debt ratio analysis.

• Bonds Issued at Par Value

  • To record a bond issued at par value, credit the "bond payable" liability account for the total face value of the bonds and debit cash for the same amount.
  • It is created by recording a credit equal to the face value of all the bonds that are issued.
  • When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest.
  • This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond.

• The Trial Balance

  • A trial balance is run during the accounting cycle to test whether the debits equal the credits.
  • The trial balance tests the equality of a company's debits and credits.
  • It lists all of the ledger, both general journal and special, accounts and their debit or credit balances to determine that debits equal credits in the recording process .
  • A trial balance only checks the sum of debits against the sum of credits.
  • If debits do not equal credits then the accountant or bookkeeper must determine why.

• Components of a Note

  • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
  • Notes Receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note.
  • The principle equals the initial amount of credit provided.
  • Maker-the maker of a note is the party who receives the credit and promises to pay the note's holder.

• Activities to Manage Receivables

  • Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit.
  • Accounts receivable represents money owed by entities to the firm on the sale of products or services on credit.
  • To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account.
  • When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
  • The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.

• Types of Transactions

  • A sale is a transfer of property for money or credit.
  • In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.
  • Purchases can be made by cash or credit.
  • As credit purchases are made, accounts payable will increase.

• Fundamental Accounting Equation

  • A double-entry bookkeeping system involves two different "columns;" debits on the left, credits on the right.
  • Every transaction and all financial reports must have the total debits equal to the total credits.
  • A mark in the credit column will increase a company's liability, income and capital accounts, but decrease its asset and expense accounts.
  • As you can see, the total amount of the debits (the amount on the left) equal the credits (the total amount on the right).