Posted in Finance, Accounting and Economics Terms, Total Reads: 1367
Definition: Credit Money
When a commodity is sold, its total value is paid for in cash but it could also be paid later and sold now. This concept is called credit. Earlier only money was the medium for buying commodities, this is replaced by tokens or IOU’s or bonds, all forms of credit money. The seller becomes and creditor and the buyer Is the debtor. When a commodity is sold money is not exchanged simultaneously during the transaction. Money is no longer the intermediately in the transaction it concludes the transaction. When the buyer is not able to get the money to pay the seller later, the property or the commodity in question can be sold. Thus the value of the commodity is important. The commodity may be delivered or even consumed before the money is realized. Any form of security or financial instrument that is not repaid instantaneously is called credit.
When people buy a house or cars on credit money, the banks issues loans and this is a form of credit that is repaid by the buyer later in installments. When a commodity is sold, rather than the intrinsic value of the good the seller accepts credit for it. Credit is nothing but money loaned, it can also been seen as an agreement between the buyer and seller that the buyer receives the good or service in advance and pays later over time with interest. If a bank loans you money then it means you are credit worthy.
E.g. If A buys a car for $10,000 and pays $1000 every month over a period of time with interest. Buyers get credit from banks or credit card companies.
In accounting entry for example in a bank account if you have $500 then it’s said that you have a $500 credit. Also if you receive a check for $100 then you receive a credit of $100. It leads to a decrease in assets and increase in liabilities or shareholders equity. It is generally the balance in the account. It is the positive cash entries in your bank account. Debit is opposite of credit i.e. money is taken from your account. In the double entry accounting system, one side is credit and the other side is debit. In this liability of equity is entered on the right side of the double entry system and asset on the left.