Is Cash Debit or Credit?
Is cash debit or credit? One of the most regularly used assets of companies is cash. It is used to settle various operating expenses, debt repayment, purchase of physical or non-physical assets, payment of dividends to shareholders, etc. Companies generate cash from the payments they receive from customers who purchase goods or services from them. Cash is recorded on the balance sheet of a company as part of its current assets along with accounts receivable, high-yield savings accounts, treasury bills, prepaid liabilities, and government bonds.
When a company receives cash, the cash account is debited. When cash is paid out, the cash account is debited. Here, we shall discuss how companies account for cash so that we can understand whether it is a debit or credit.
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Debits and credits explained
Debits and credits can be confusing sometimes, especially since debiting some accounts increases some accounts but decreases some while crediting some accounts increases them but some other accounts decrease with a credit. For cash, a debit increases the balance while a credit decreases it. (The cash account is debited to account for an increase in cash and it is debited to account for a decrease in cash).
The double-entry accounting system ensures that a company’s financial books are balanced. Debits are usually recorded on the left-hand side while credits are recorded on the right-hand side. For instance, if a company sells goods worth $60 on October 21, 20022 to a customer who paid in cash, it will be recorded as a debit to the cash account and a credit to the accounts receivable. This is done to keep in line with the double-entry accounting system. We shall discuss more on the journal entries for cash later on but before them, let us look at what the above example will look like.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 21/10/2022 | Cash | $60 | |
| Accounts receivable | $60 |
From the example above, we can see that a debit to the cash account had an equal but opposite entry as accounts receivable. The accounts receivable records the payments due to the company from its customers. Since this payment was made in cash, the cash account gets debited to indicate an increase in cash while the accounts receivable is credited to indicate a decrease in the balance.
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Is Cash Debit or Credit?
We mentioned earlier that cash is part of a company’s current assets. Current assets are those assets that can be disposed of by a company within one fiscal year. Assets are resources that are utilized by companies to either reduce their cash outflows or increase their cash inflows. Since cash can be easily measured and used as a medium of exchange, it is considered a valuable asset to the company. Its use in daily business operations makes it an operating asset that is core to generating income.
Cash is additionally considered part of a company’s tangible assets since it can be physically seen and touched. Furthermore, some inherent features of cash include:
- Acceptability: Cash is accepted everywhere because it is a means of value exchange that is allowed for use and printed by the central bank of various countries.
- Durability: Part of the reason why cash is a medium of exchange is its durability, meaning that it lasts long unless torn.
- Uniformity: Although cash comes in different values such as $1, $100, etc, they still have the same size and shape.
- Divisibility: Cash can be divided into smaller units easily.
- Portability: Cash is light weighted and can be easily carried from one place to another.
- Limited supply: The fact that cash can only be printed by the central bank makes its supply limited.
So far, we have understood that when there is an increase in cash, it is recorded as a debit while a decrease is recorded as a credit. Below, we shall look at some journal entries for cash transactions that companies make.
Debit and credit journal entries for cash
As companies keep accounts of their transactions using the double-entry accounting system, all transactions must be accounted for with a debit and a credit. A debit to the cash account increases the account balance while a debit decreases the balance. The cash account is debited whenever money comes into the account from the sale of goods, services, or assets. When a company uses cash to make purchases or settle debts, if the purchase or debt settlement was made from the cash account, it will be recorded as a credit to the cash account.
For instance, if a company decides to sell off one of its real estate for $1,000,000 and the buyer made payments into the company account on the day of the purchase. The transaction will be recorded as a debit to the cash account since $1,000,000 was paid into the account and a credit to the fixed asset account since the real estate which is a fixed asset was sold off. The debit to the fixed asset account signifies a reduction in the fixed asset balance. The journal entry will look like the one below.
Debit and credit journal entry for cash received from the sale of a fixed asset
| Date | Account | Debit | Credit |
|---|---|---|---|
| 30/9/2022 | Cash | $1,000,000 | |
| Fixed assets | $1,000,000 |
One of the most common entries companies make for the cash account is for goods sold or services provided. For the sale of goods, there will be a debit to the cash account and a credit to sales.
Suppose a company sells goods worth $40,000 which was paid for in cash, the journal entry to record this cash sale will be as follows.
Debit and credit journal entry for cash received from the sale of goods
| Date | Account | Debit | Credit |
|---|---|---|---|
| 15/10/2022 | Cash | $40,000 | |
| Sales | $40,000 |
In order to record the payment for a service rendered, the cash account will be debited while the service revenue account will be credited. For example, suppose Mark contracted a cleaning company to clean his house on October 15, 2022. If the service provided costs $10,000 and Mark paid for the service in cash, the journal entry will look like the one below:
Debit and credit journal entry for cash received from services rendered
| Date | Account | Debit | Credit |
|---|---|---|---|
| 15/10/2022 | Cash | $10,000 | |
| Service revenue | $10,000 |
Companies incur expenses for daily business operations, when this happens and the cash account was used to settle the expense, it will be recorded as a debit to the account for which the expense was made and a credit to the cash account since the payment was made in cash. If for instance, a company purchases office supplies on October 31, 2022, that cost $2,000, and they were paid for in cash. The office supplies account will be debited while the cash account will be credited. The journal entry will be as the one below.
Debit and credit journal entry for purchasing office supplies with cash
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31/10/2022 | Cash | $2,000 | |
| Office supplies | $2,000 |
Is cash a debit or credit?
There are instances however where cash can be a debit. These are instances whereby money is taken out from the cash account to take care of certain expenses, purchase assets or reinvest into the business.
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Conclusion on debiting and crediting of cash balances in Accounting
Therefore, is cash debit or credit? From our discussion, we have seen that cash is a debit. However, in situations where cash is deducted from the cash account and used to settle certain obligations or make purchases, it can be a credit. Cash is an asset account on the balance sheet that is also classified as an operating asset due to its use in the day-to-day running of businesses.
Cash includes payments received for goods or services provided. It also includes income from the sale of assets. In order for a company to have a smooth operation, it must have a certain amount of cash that it can utilize for the efficient and effective running of the business.
