In accounting, what does a credit entry typically do?

In accounting, a credit entry is primarily used to decrease assets or increase liabilities. This aligns with the double-entry accounting system, where every transaction affects at least two accounts. When a credit is recorded in the accounting books, it represents a movement that is opposite to that of a debit entry.

For example, if a business takes a loan, it will increase its liabilities (as it now owes money) and at the same time increase its cash or other asset accounts, reflecting money entering the business. That increase in liability is recorded as a credit. Conversely, if the company sells an asset, like equipment, it decreases an asset account and will also record that transaction as a credit.

This mechanism is crucial for maintaining balance in the accounting equation (Assets = Liabilities + Equity) and ensuring that financial statements correctly reflect a company's financial position. Understanding how credits work is fundamental to effective accounting practice, allowing for accurate tracking of a company’s financial health.