Unit 1

Principles of Credit (Meaning, Nature, Classification, and Functions of Credit)

Module 1
DEFINITION, NATURE, ADVANTAGES AND DISADVANTAGES OF CREDIT

Credit is one of the unique features of our business system. Business firms sell to consumers on
credit and buy from other businessmen on credit. The word credit comes from the latin word
“CREDERE’ or “CREDITUM” which means “To Trust”. The wide spread use of credit is a strong
evidence to support the belief that people have trust in one another.

Definition of Credit
This term is broad with many different meanings in the financial world. Credit is generally defined
as a contractual agreement in which a borrower receives something of value now and agrees to
repay the lender at a later date—generally with interest.

Credit is generally defined as an agreement between a lender and a borrower, who promises to
repay the lender at a later date—generally with interest.

Credit also refers to an individual or business' creditworthiness or credit history.

In accounting, a credit may either decreases assets or increases liabilities and equity on a
company’s balance sheet

For example, when someone uses his or her Visa card to make a purchase, the card is considered
a form of credit because they are buying goods with the understanding they will pay the bank
back later.

Financial resources are not the only form of credit that may be offered. There may be an exchange
of goods and services in exchange for a deferred payment, which is another type of credit.

When suppliers give products or services to an individual but don't require payment until later,
that is a form of credit. So when a restaurant receives a truckload of food from a vendor who
doesn't demand payment until a month later, the vendor is offering the restaurant a form of credit.

Credit is defined as the ability to obtain a thing of value in exchange for a promise to pay definite
sum of money on demand or future determinable time. A thing of value may mean cash, goods
or services.

Credit may also mean the ability to possess goods, services or even money in exchange for a
promise to pay it equivalent in monetary units at determinable future time.

Credit is an arrangement that allows to buy goods or services now and pay for them later.

It can also be understood to mean these transactions or exchanges in which payment is to be

expected at some time after acceptance of the goods or money.

In the first and most common definition of the term, credit refers to an agreement to purchase a
good or service with the express promise to pay for it later. This is known as buying on credit. The
most common form of buying on credit is via the use of credit cards. People tend to make
purchases with credit cards because they may not have enough cash on hand to make the
purchase. Accepting credit cards can help increase sales at retailers or between businesses.

The amount of money a consumer or business has available to borrow—or their

creditworthiness—is also called credit. For example, someone may say, "He has great credit, so
he's not worried about the bank rejecting his mortgage application."

Service credit is an agreement between a consumer and a service provider such as a utility, cell
phone, or cable service.

In other cases, credit refers to a deduction in the amount one owes. For example, imagine
someone owes his credit card company PhP1, 000, but he returns a purchase worth PhP300 to
the store. He receives a credit on his account and then owes only PhP700.