Definition of Credit and Collections

by Matt McGew; Updated September 26, 2017

Generally, credit is defined as the process of providing a loan, in which one party transfers wealth to another with the expectation that it will be paid back in full plus interest. The definition of collections is connected to the term credit. Collections generally refers to the current period’s sales and the credit sales of the last period combined. However, you can also define both terms in several other ways.

Credit in Finance

A credit contract is a legal agreement whereby one party loans funds to another. The terms of the contract specify the amount lent, the payback date and the interest rate on the loan. In other words, a credit is a contract of a loan or delayed payments of funds or goods. Credit can also refer to the borrowing capacity of an enterprise or individual. The term is often used to mention the terms and conditions of a postponed payment option, while the word credit also denotes the period that is offered for deferred payment.

Credit in Accountancy

According to the book "Financial Accounting: An Introduction to Concepts, Methods, and Uses," in accounting theories credit stands for a journal entry that registers an increase in assets. Credit is also known as the part where payments of debtors are registered, which is typically the right side of a ledger account. As a consequence, you can mean the aggregate of all the entries or just a single entry with this term. Moreover, sometimes a credit line is understood as credit.

Collections in Finance

Collections is the receipt of a check, draft or other negotiable instrument to for the purposes of restituting a loan. The book "Principles of Finance" claims that you can use this term not only for check clearing and payment, but also for other banking services such as the collection of returned items or bad checks, coupon collection and foreign collections. In general finance, collections also refers to the conversion of accounts to cash.

Collections in Accountancy

In accountancy and banking the term collections is understood in two ways. First, it is the presentation of a draft or check and the new credit entry or the receipt of the obtained amount in cash. Second, collections refers to the shift of past-due or delinquent accounts to a collection agency or department, which has the task to partially or fully recover the lent funds.

References

  • "Principles of Finance"; Scott Besley and Eugene Brigham; October 2005
  • "Financial Accounting: An Introduction to Concepts, Methods, and Uses"; Clyde Stickney and Roman Weil; 2002

About the Author

Since 1992 Matt McGew has provided content for on and offline businesses and publications. Previous work has appeared in the "Los Angeles Times," Travelocity and "GQ Magazine." McGew specializes in search engine optimization and has a Master of Arts in journalism from New York University.