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 accountsNominal AccountsNominal Accounts are the general ledger accounts which are closed by the end of an accounting period. Their balance at the end of period comes to zero so they don't appear in the balance sheet.), what goes out (in real accountsReal AccountsReal accounts do not close their balances at the end of the financial year but retain and carry forward their closing balance from one accounting year to another. In other words, the closing balance of these accounts in one accounting year becomes the opening balance of the succeeding accounting year.) 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 an applicant’s character is really crucial for lenders to protect themselves from defaulting customers.
- Capacity – The capacity of a loan application can be determined by his or her debt to income ratioDebt To Income RatioThe debt to income ratio (DTI) measures the borrower's potential to clear the liabilities (payable in installments) from the monthly income. It is computed as a percentage of monthly debt payments to the gross monthly income. The lower the ratio, the higher is the borrower's repayment capability.. The determination of a borrower’s capacity 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. The greater the contribution, the greater 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 as a backup if the borrower cannot pay back the loan amount in the future.
- Conditions – Conditions signify the amount 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 loans, which includes mortgages, home loans, car loans, educational loans, signature loans, business loans, and other creditCreditA line of credit is an agreement between a customer and a bank, allowing the customer a ceiling limit of borrowing. The borrower can access any amount within the credit limit and pays interest; this provides flexibility to run a business. lines. 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 balanceCredit BalanceCredit Balance is the capital amount that a company owes to its customers & it is reflected on the right side of the General Ledger Account. Usually, Liability accounts, Revenue accounts, Equity Accounts, Contra-Expense & Contra-Asset accounts tend to have the credit balance. 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 – DebitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits. recorded when there is a rise in the value of assets, losses, dividends, 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, and 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-keepingDouble-entry Book-keepingDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. – 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, an 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 time, all at once or in EMIs (monthly installments).
- The credit option makes it easier for borrowers to buy what they want at their own pace without worrying about the available funds.
- Credit options taken from a banking or financial institution reduce the borrowers’ burden 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 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 on 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 on the right-hand side of a T ledger account. Credit has its advantages and disadvantages. A borrower must self-evaluate whether they are ready or whether they must borrow a loan to fulfill 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 to make the best use of his decision and not have to regret in the future.
This has been a guide to the Full Form of Cr (Credit) and its definition. Here we discuss characteristics, types, and examples of Cr along with its differences from debit. You may refer to the following articles to learn more about finance –