When it comes to running a business, credit can mean three things: an agreement to borrow money, someone’s history of borrowing, or a bookkeeping term.
Let’s go through these three definitions in more detail.
Credit agreement
It can be used to refer to an agreement where someone borrows money or receives goods and services, and pays later. We call the lender a creditor, and the borrower a debtor.
An example could be if you provide consulting services throughout a month, and bill the client at the end of the month.
Sometimes the lender has to pay interest, for example with some credit cards, on when they’ve taken out a loan.
Credit history
Credit history is used to refer to your borrowing history. If you have good credit it means you have a history of paying what you owe. If you’ve paid late or not paid at all, you have bad credit. This can get in the way of getting a mortgage, or mean that you have to take out loans with higher interest rates.
When bookkeeping
It can also be used as an accounting term. When you record a transaction in your accounting system, you follow a system called double-entry bookkeeping.
This means that you record all transactions in at least two places so that it’s possible to see where the money came from and where the money went. By using this method, all transactions can be verified.
Credit is considered minus, while debit is considered as plus. They should balance out to 0.
Let’s look at an example. If you buy an office chair for $500, it would be recorded in this way:
+ $500 added to your equipment (debit)
– $500 removed from your business bank account (credit)
When you do it in this way, your account shows what your business owns. After the purchase, you do have less money in your bank account, but you also have an office chair that’s worth money.