How Debits & Credits Work With Cash Transactions

The primary function of debits and credits is to show a flow of money or value from one account to another

What are Cash Transactions?

Cash transactions are those transactions the business makes with the bank.

These transactions will be shown on the business’s month end bank statement.

For example, suppose the business  receives cash from sales.

The business will deposit this money in the bank.

In its month-end statement, the bank will show the transaction as a deposit.​

​The business will also pay cash for things.

In doing this, the business will withdraw money from the bank.

The transaction will appear on the month-end bank statement as a withdrawal.

Recording Cash Transactions

With the double-entry system, you need to record every transaction made with the bank.

Capital Injection

For example, to start up, the owner may have put some of their own money into the business.

They would deposit this money in the business’s bank account.

To record this transaction, you credit the capital account.

This shows that the money came from the owner’s capital.

At the same time, you debit the checking account.

This shows the money was deposited in the bank.

Loan Transaction

The business owner may also borrow additional start-up money from a friend or a relative.

Once received, they will deposit this money in the bank, as well.

To record this transaction, you credit the loan account.

This shows money came from a loan.

​At the same time, you debit the checking account.

​This shows the money was deposited in the bank.

Expense Transaction

After this, the business owner may rent premises for the store.

​Here, they would take money from the checking account.

Then they send this money to the landlord.

​To record this transaction, you credit the checking account.

​This shows money came from the bank.

Next, you debit the rent account.

​This shows the money was used for rent.

Purchase Transaction

The business owner may buy goods to sell in the store.

Again, they take money from the bank.

​And they use this money for purchases.

​To record the purchase, you credit the checking account.

This shows money came from the bank.

Next, you debit the purchases account.

This shows the money was used for purchases.

Cash Sale Transaction

​The store will then sell these goods.

If these are cash sales, the business will deposit the takings in the bank.

​To record the transaction, you credit the sales account.

This shows the money came from sales.

Next, you debit the checking account.

This shows the takings were deposited in the bank.

Lesson 3 shows how the whole system comes together in the checking process

© R.J. Hickman 2020