What Is a Credit Adjustment?
The term "credit adjustment" means different things for bankers and accountants. In accounting terminology, crediting a financial item may increase or decrease its value, a scenario that's not always the case in banking. Regulatory guidelines, such as banking rules and accounting principles, tell companies when and how to make credit adjustments.
When a bank makes a credit adjustment to your account, this typically is good news because money is coming into the account. Credit adjustments may happen for reasons as varied as refunding a customer, correcting a prior error, payments stemming from a business deal or periodic payroll direct deposits. Banking credits increase an account holder's cash balance, which is a short-term asset account because the client most likely will use the money in the next 12 months. Financial managers use the term "long-term asset" to describe money you won't touch for several years, such as cash in an individual retirement arrangement, or IRA, account.
An accounting credit adjustment helps a company correct errors in its books, abide by regulatory guidelines and ascertain the value of specific accounts. The term "credit" marks the record-keeping status of an account and the underlying transaction tells a reviewer whether a credit entry increases or decreases an account's worth. In practice, a corporate bookkeeper credits an asset or expense account to decrease its value, decreasing an equity, revenue or debt account to increase its amount. Therefore, a credit adjustment to an asset account reduces the account's worth. You can apply this example to all financial accounts to figure out whether a credit adjustment will reduce or augment their values.
A banking credit adjustment is distinct from an accounting credit adjustment, but both constructs often interrelate. When a bank credits a customer account, it's simultaneously increasing the client's cash balance and increasing its own debt account. This is because customer deposits are liabilities -- the other name for debts -- for banks, and they must remit funds if clients ask for their money.
Preparing and monitoring credit adjustments are as important to bankers as they are to accountants. This is because these numerical modifications bring mathematical order to account balances, ensure data accuracy and remove uncertainty from the record-keeping process -- all things that are essential to prepare and present operational data summaries that are correct and law-abiding. "Data summary" is another term for financial statement or accounting report. Examples include a statement of financial position, a statement of retained earnings and an income statement, which finance people often call a report on profit and loss.