Vareto Finance Glossary



In accounting, credit refers to a bookkeeping entry that results in a decrease in assets or an increase in liabilities and equity on the company's balance sheet. Credit can also be referred to as a contract agreement between a borrower (of money) to repay the lender at a later date, along with the interest applicable.


Suppose a company buys its office furniture using credit. It must record this financial transaction on its balance sheet. This purchase will result in an increase in its inventory account balance since furniture is an asset. However, the company's accounts payable must also rise by the amount of this purchase since it is bought using credit (which is a liability since the company owes the money).

Why it matters

Companies must ensure that their credit needs are controlled and monitored. Too much credit may result in higher interest outflow while too little credit could result in growth constraints in the long run.