Full Form Of Cr Credit Examples Of How It Works

Full Form of Cr – Credit

Characteristics of Credit

The five characteristics of credit are discussed as follows-

Character – Their credit history can determine the borrower’s character. Character is the foremost characteristic of Cr or credit and is also regarded as credit history. The applicant can justify their character by proving themselves as a responsible borrower. Determining an applicant’s character is crucial for lenders to protect themselves from defaulting customers.Capacity – The capacity of a loan application can be determined by its debt to income ratioDebt To Income RatioThe Debt to Income (DTI) ratio measures the ability of an individual or entity to pay back their debt or installments easily without any financial struggle.read more. Determining a borrower’s capacity is crucial for the lenders to confirm his ability to repay the loan.Capital – The capital signifies a borrower’s total funds and resources. Capital can be determined by 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.Collateral – Collateral signifies the security the borrower has pledged against the loan they have applied for. Collateral security acts as a backup if the borrower cannot repay 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.read more 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.

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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. read more 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 represents either an increase in a company’s expenses or a decline in its revenue. read more is 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 and 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 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. read more – An increase in assets is debited while the increase in liabilities is credited to a balance sheet. In the case of a profit and loss accountProfit And Loss AccountThe Profit & Loss account, also known as the Income statement, is a financial statement that summarizes an organization’s revenue and costs incurred during the financial period and is indicative of the company’s financial performance by showing whether the company made a profit or incurred losses during that period.read more, an increase in expenses is debited while the increase in income is credited.

Advantages

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 from a banking or financial institution reduce the borrowers’ burden to pay the full amount in one shot. The borrowers can make a down payment and avail the option of paying monthly EMIs spread over some time.

Disadvantages

The disadvantages of credit are as follows-

The borrowers will be required to pay interest on the loan.The borrowers will be required to pay late fees if they default a payment.The borrowers can even impact their creditworthinessCreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new loan.read more 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.

Conclusion

Credit refers to a journal entry that is recorded on the right-hand side of a T ledger account. The characteristics of Credit or Cr are character, capacity, capital, collateral, and conditions. 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.