What is the effect of a credit entry?

A credit entry has the effect of increasing liabilities and equity accounts in financial accounting. When a credit is recorded, it signifies either an increase in money owed (liabilities) or an increase in ownership interest (equity). This aligns with the double-entry accounting system, where every transaction affects at least two accounts—one side is credited, and the other is debited. For instance, when a business takes out a loan, it credits its liabilities to reflect the increased obligation to repay that money.

In contrast, a debit entry would typically increase an asset account or decrease a liability or equity account. This fundamental aspect of accounting helps maintain the balance in the accounting equation (Assets = Liabilities + Equity), ensuring that the financial statements remain accurate. Understanding this principle is essential for interpreting financial transactions correctly.