Full Form of Cr – Credit
The full form of CR is Credit. The word credit has different meanings in the world of financial accounting as sometimes it can be referred to as a journal entry made on the right-hand side of an account representing a rise in assets and records all the income and revenues (in nominal accounts), what goes out (in real accounts) and is regarded as a giver (in personal accounts) and sometimes, it also represents an agreement between a borrower and a lender concerning the loan amount borrowed by the former from the latter for a particular time period.
Characteristics of Credit
The five characteristics of credit are discussed as follows-
- Character – The character of the borrower can be determined by looking at his or her credit history. Character is the foremost characteristic of Cr or credit and it is also regarded as credit history. The applicant can justify his or her character by proving himself or herself as one responsible borrower. The determination of the character of an applicant is really crucial for lenders in order to protect themselves from defaulting customers.
- Capacity – The capacity of a loan application can be determined by his or her debt to income ratio. The determination of the capacity of a borrower is crucial for the lenders to confirm his ability to pay back the loan.
- Capital – The capital signifies the total funds and resources that a borrower has. Capital can be determined by looking at the amount of money a loan applicant has invested in his business and greater the contribution, greater shall be the chances for him or her to qualify for the loan amount.
- Collateral – Collateral signifies the security that the borrower has pledged against the loan he or she has applied for. Collateral security acts a backup if in case the borrower is unable to pay back the loan amount in the future.
- Conditions – Conditions signifies the amount that is involved, the real purpose of applying for the loan, and ongoing interest rates.
Types of Credit
Credit can be of various forms. It can be in the form of financial credit or bank loan which includes mortgages, home loan, car loans, educational loans, signature loans, business loans, and other lines of credit. There are other forms of credit too. For example, the exchange of products or services against deferred payment, the credit offered by the suppliers or creditors to the company against the number of raw-materials purchased by the latter, etc.
Examples of Credit
ABC Limited took a loan of $20,000. The company has an underlying credit of $10,000 and a debit of $200. The carrying balance of the company is $9,800 ($10,000-$200). This means ABC owes $9,800 to its creditors. The credit balance of the company at the end of that year would be $29,800 ($20,000+$9,800).
Difference Between Credit and Debit
The difference between credit and debit are discussed as follows-
- Definition – Debit is a journal entry that is recorded when there is a rise in the value of assets, losses, dividends as well as expenses or fall in the value of liabilities and shareholders’ equity. On the other hand, credit can be defined as a journal entry that is recorded when there is a fall in the value of assets or a rise in the value of incomes, gains, revenues, liabilities as well as shareholders’ equity.
- Treatment in personal accounts- In a personal account, debit is regarded as the “receiver” while credit is regarded as the “giver”.
- Treatment in real accounts- In a real account, debit is regarded as what “comes in” while credit is regarded as what “goes out”.
- Treatment in nominal accounts- In a nominal account, all expenses, as well as losses incurred by an organization, are “debited” while all incomes and revenues are “credited”.
- Left/ right side in a T-format ledger- A debit entry is recorded on the “left-hand side” in a T-format ledger. On the other hand, a credit entry is recorded on the “right-hand side” in a T-format ledger.
- Use- Debit generally indicates an increase whereas credit generally depicts the amount withdrawn.
- Double-entry book-keeping– An increase in assets is debited while the increase in liabilities is credited in a balance sheet. In the case of a profit and loss account increase in expenses is debited while the increase in incomes is credited.
The advantages of credit are discussed as follows-
- Credit gives the borrowers the option to buy something even if they lack sufficient funds for making such a transaction in the present and enables them to repay the loan amount over a period of time all at once or in EMIs (monthly installments).
- Credit option makes it easier for the borrowers to buy what they want at their own pace without having the need to worry about the available funds.
- Credit options taken from a banking or financial institution reduces the burden of the borrowers to pay the full amount in one shot. The borrowers can simply make a down-payment and avail the option of paying monthly EMIs spread over a period of time.
The disadvantages of credit are as follows-
- The borrowers will be required to pay an interest amount on the loan taken.
- The borrowers will be required to pay late fees in case they default a payment.
- The borrowers can even impact their creditworthiness if they default their loan payments.
- Impacted credit rating will make it difficult for borrowers to secure a loan or credit in the future.
The characteristics of Credit or Cr are character, capacity, capital, collateral, and conditions. Credit refers to a journal entry that is recorded in the right-hand side of a T ledger account. Credit has its advantages and disadvantages. A borrower must self evaluate whether he or she is ready or whether it is necessary for him or her to borrow a loan for fulfilling a specific purpose. A borrower must look at both the advantages and disadvantages of taking credit and then self assess himself and his purpose behind making such a decision in order to make the best use of his decision and not have to regret in the future.
This has been a guide to Full Form of Cr (Credit) and its definition. Here we discuss characteristics, types, an example of Cr along with its differences from debit. You may refer to the following articles to learn more about finance –