Summary

on credit

In accounting, “on credit” simply means “buy now, pay later” or “sell now, collect later.”

It indicates that a transaction has taken place, but no physical cash was exchanged at that exact moment. Instead, there is a legal agreement or promise that the money will be paid in the future.

1. When you SELL “on credit” (Your Typewriter Example)

When you sold the typewriter on credit, you gave the buyer the typewriter immediately, but they didn’t give you cash.

• What it creates: An Asset called Accounts Receivable.
• Meaning: This is money that is “receivable” (owed to you) by a customer. Even though you don’t have the cash yet, the right to receive that money is considered a valuable asset.

2. When you BUY “on credit”

If you were the one buying a typewriter on credit, you would take the machine home today and pay the store next month.

• What it creates: A Liability called Accounts Payable.
• Meaning: This is money that is “payable” (owed by you) to a supplier. It is a debt you must eventually settle.