CREDITCREDIT

Origin of the terms debit Origin of the terms debit and creditand credit

• The terms Debit and Credit have Latin roots. Debit comes from debere, which means "to owe". The Latin debitum means "debt".

• Credit comes from the Latin word credere, which means "to believe" or "to entrust".

• It is more common to use the plural terms "Debits" and "Credits".

Why we use Cr for Credit Why we use Cr for Credit and Dr for Debitand Dr for Debit

• There are a few possible explanations. One theory asserts that the DR and CR come from the Latin past participles of debitum and creditum which are "debere" and "credere", respectively.

• Another theory is that DR stands for "debit record" and CR stands for "credit record".

• Finally, some believe that DR notation is short for "debtor" and CR is short for "creditor".

What is Credit?What is Credit?• The word ‘Credit’ is derived from the Latin word

‘credere’. The word ‘credere’ means “I TRUST YOU”.• Credit is defined by Gide as “An exchange which is

complete after the expiry of a certain period of time after payment”.

• Credit is explained as the sale of goods and services and money that claims in the present in return for a promise to pay in the future.

• The promise usually based on the confidence and on the belief that the debtor whether a person, a business firm or a government unit will be able and willing to pay on demand or at some future time.

What is Credit?What is Credit?• “Credit is the right to receive payment” or the

obligation to make payment on demand or at some future time on account of an immediate transfer of goods”.

• The first phrase ‘right to receive payment’ is used from the poinat of view of Creditors as he is to exchange present goods for the right to receive payment in future.

• The second ‘An obligation to make payment on demand’ is the phrase from debtor’s point of view. The debtor has an obligation to pay in the future for the goods required.

• Credit and Debit are thus two sides of the same shield.

Functions of CreditFunctions of Credit• To give credit is to finance directly or

indirectly the expenditure of others against future repayment.

• Credit is the foundation upon which the economic structure of the countries both developed and developing is strengthening.

• The main functions which arises from the use of credit are summarized below:

Functions of CreditFunctions of Credit– Economy in the use of money– Provision of working capital– Sales of bonds– Case of young firm– Large scale production– Shifting of capital to productive hands– Entrance of new entrepreneur– Purchase of goods– International payments– State revenue

Functions of CreditFunctions of Credit•Economy in the use of money:

• Credit instruments are used as medium of exchange in place of metallic coins.

• There is thus a saving of precious metals.

Functions of CreditFunctions of Credit•Provision of working capital:• If an industrialist is short of spending

power when the production is going on, he can finance the industry by obtaining of credit from the banks.

• He needs not sell the plant or other fixed assets just for the purchase of raw material, paying wages to the labors, insurance charges, electricity bills etc

Functions of CreditFunctions of Credit•Sales of bonds:• If the prospects of invested capital are

bright and the profits are being earned easily, the firm can obtain possession of funds even by selling bonds.

• The firm can repay the interest as well as principal amount easily at the specified date out of profit earned during the course of production.

Functions of CreditFunctions of Credit•Case of young firm:• Credit enable the entrepreneur of a

young firm to develop its resources at a rapid speed which otherwise would not have been possible.

Functions of CreditFunctions of Credit•Large scale production:• The institutions of credit have provided a

ready flow of money to the industrialists. When they receive the large sum of capital the production is increased on large scale.

• The cost of production of commodities is reduced. The quality of product also improve with greater technological research carried on in the big firms.

Functions of CreditFunctions of Credit•Shifting of capital to

productive hands:• There are people who have surplus money

with themselves, instead of keeping the money idle in their safe deposits, they lend it to the financial institutions.

• Credit thus makes possible the shifting of money to those people who can use it productively.

Functions of CreditFunctions of Credit•Entrance of new

entrepreneur: • Credit makes possible the entrance of new

talent in the business enterprise.• If a person has less capital of his own but

has all the qualities of a good entrepreneur, he can setup new firms and develop modern techniques of production, and thus the resources of the country are effectively utilized.

Functions of CreditFunctions of Credit•Purchase of goods:• Credit makes it easy and convenient to the

consumer to purchase or hire goods.• A consumer can acquire flour, cloth, telephone,

radio, car, house, washing machine etc from the dealer with an obligations to pay in future either by installment or in lump sum.

• The credit thus provides an opportunity to the consumer to use and enjoy more goods which otherwise would not have been possible if the payment is to be paid in cash.

Functions of CreditFunctions of Credit•International payments:• International payments especially

through the bills of exchange, have been greatly facilitated.

Functions of CreditFunctions of Credit•State Revenue:• If the government expenditure is

more than of its current revenue. It can meet the deficit by the sales of bonds.

• Thus the timely needs of the state are satisfactorily met through credit.

What is Cash Reserve?What is Cash Reserve?• Cash reserve is the liquid form of asset. It is to be

kept by a bank in vaults and with the central bank of the country in order to meet the demands of the customers.

• Cash reserve of the bank includes three items• (i) Cash in hand• (ii) Cash kept with the central bank of the country

and• (iii) Cash kept with other banks.• Cash reserve is regarded as the bank’s first line of

defense to ward off bankruptcy.