Introduction
In double-entry bookkeeping, credits are just as important as debits. Every financial transaction involves both sides of the ledger to keep the accounting equation in balance. While debits appear on the left side of a T-account, credits are recorded on the right.
👉 If you’re new to debits, read our guide on What Are Debits in Accounting? for a complete understanding of how the two concepts work together.
What Is a Credit in Accounting?
A credit is an entry made on the right side of a T-account. Credits have the opposite effect of debits:
- Credits increase: Liabilities, Equity, and Revenue.
- Credits decrease: Assets, Expenses, and Dividends.
This system ensures the accounting equation (Assets = Liabilities + Equity) always balances.
How Credits Work in Practice
Example 1: Recording Cash Sales
When your business earns $1,500 from a sale:
- Debit Cash (Asset) → increases assets.
- Credit Revenue → increases income.
Example 2: Taking Out a Loan
Suppose you borrow $10,000 from a bank:
- Debit Cash (Asset) → increases assets.
- Credit Bank Loan Payable (Liability) → increases liabilities.
Example 3: Paying a Dividend
If your company declares a $2,000 dividend:
- Debit Dividends → increases dividend account.
- Credit Cash → decreases assets.
Credits and the DEALER Rule
Accountants use the acronym DEALER to keep debit and credit rules clear:
- D – Dividends (Debit)
- E – Expenses (Debit)
- A – Assets (Debit)
- L – Liabilities (Credit)
- E – Equity (Credit)
- R – Revenue (Credit)
Accordingly, credits increase the last three categories (L, E, R) and decrease the first three (D, E, A).
Credits in Canadian Accounting Standards (ASPE vs. IFRS)
Both ASPE (Accounting Standards for Private Enterprises) and IFRS (International Financial Reporting Standards) apply the same double-entry principle. Credits are always recorded on the right side of accounts.
- ASPE: Allows flexibility in presentation for private companies.
- IFRS: Requires detailed disclosures for public companies, especially regarding equity and revenue.
Although the reporting requirements differ, the treatment of credits is consistent across both standards.
Credits, Accounts, and CRA Reporting
When Canadian corporations file a T2 corporate tax return, they must classify all accounts using GIFI codes. For instance:
- 3140 = Long-Term Debt (Liability account)
- 3620 = Total Shareholder Equity (Equity account)
- 8000 = Trade Sales of Goods and Services (Revenue account)
Credits to liabilities, equity, or revenue accounts flow into these GIFI categories, ensuring standardization in CRA filings.
👉 Learn more about accounts in our guide: What Is an Account in Accounting?.
Internal Resources
- What Are Debits in Accounting?
- GIFI Codes – General Index of Financial Information
- Accounting Equation Explained
- The T-ACCOUNT DEALER Rule in Accounting to Understand Debits and Credits
Key Takeaway
A credit in accounting is an entry on the right side of a T-account. It increases liabilities, equity, and revenue while decreasing assets, expenses, and dividends. Together with debits, credits form the foundation of the double-entry system, ensuring accuracy and compliance with Canadian standards and CRA reporting.
