In accounting, why is the the asset account debited when cash comes in and credited when cash goes out?


Normally debit should show a decrease and credit should show an increase but I just started accounting and I noticed the concept seems to be in reverse as an increase in an asset is a debit and a decrease is a credit. I can’t make any sense out of this, can someone explain like I am five?

In: 7

Debits record money flowing into an account, and credits record money flowing out of an account.

For asset accounts, this means that increasing the asset is a debit. If you have a cash account and add more cash, cash flows into the account, hence being a debit.

For liability accounts, this is the same but is counterintuitive. When a liability account goes up, it means that you took on more debt or have more you eventually have to pay. This means that when the liability account goes up, it is credited and when it goes down it is debited. Think of it like this – if you take out a loan, cash flows from the loan to your bank account – meaning that cash is debited (money flowed in) and the loan is credited (money flowed out).

This can be hard to remember, but just remember that for every action on the balance sheet, an equal but opposite action must also exist somewhere (hence the name _double entry bookkeeping_). For every debit on an asset, there must also be a credit to an asset, liability, or equity.

So if you buy (and debit) a new asset, you can either pay cash today (and credit your cash account, because cash left) or you can pay cash later (and credit your accounts payables account, because cash _will_ leave). Later when you do pay, you’ll credit cash (since cash left) and debit AP.

**Edit**: I want to add something here addressing your first sentence – the reason it doesn’t make sense based on the way you have historically heard these terms used is because you are looking at it from _your_ perspective, not the _company’s_ perspective with whom you are doing business. Your phone bill is a liability to you (money you owe) but it is an _asset_ to your phone company (money they are owed – accounts recievables). When they give you a bill ‘credit’ it decreases the money that the phone company is going to get from you – which means it decreases their asset account, and we’ve established that credits decrease the value of asset accounts. From their perspective, the language is perfectly consistant.

In accounting, when cash comes in, it is recorded as an increase in the asset account. When cash goes out, it is recorded as a decrease in the asset account. This is because the asset account is a measure of the company’s financial health and assets. When cash comes in, it is a sign that the company is doing well financially and is able to invest in its business. When cash goes out, it is a sign that the company is not doing well financially and needs to use its assets to pay its bills.

That’s just the way it is in accounting. Yes, counterintuitive to how you’ve been thinking about it your whole life, but accounting has been using those terms in that manner longer than you’ve been alive. You’ll get used to it.

The comment that just got posted was a perfect explanation.

I’m going to add – like a lot of things in life, what society has labeled words to mean is very different than the true definition or application of it.

You’re thinking about it in the context of what your bank statement shows. Banks work in the opposite way to normal businesses. For them, getting your cash is a liability, because they owe it to you (it’s like you are loaning it to the bank). For a liability a debit decreases the balance and a credit increases the balance. For a normal company cash is an asset and is increased by debits and decreased by credits.