In your own books, cash increases with a debit and decreases with a credit. Whether cash is a debit or a credit comes down to what kind of account it is: cash is an asset, and every asset account goes up on the debit side and down on the credit side. So when money lands in your business, the journal entry starts with a debit to cash. When money leaves, you credit cash.
Why Cash Follows the Debit-Increases Rule
The accounting equation puts assets on the left: assets equal liabilities plus equity. Anything that lives on the left side of that equation has what accountants call a normal debit balance, meaning the account’s default direction is a debit. Adding to the account pushes it further in its normal direction. Reducing it pushes it the other way.
Cash is an asset, so its normal balance is a debit. Receive money, debit cash. Spend money, credit cash. That rule does not change based on where the money came from or where it is going.
The IRS describes double-entry bookkeeping the same way: every account has a left side for debits and a right side for credits, and after you post your journal entries, total debits have to equal total credits.1Internal Revenue Service. Publication 583, Starting a Business and Keeping Records That balance requirement is why every cash entry has a partner on the other side.
What You Credit When Cash Goes Up
A debit to cash is only half the entry. The credit side names the reason the money came in. Three situations cover most incoming cash:
- A customer pays an invoice. Debit cash for the amount received; credit accounts receivable for the same amount. Cash goes up, and the amount the customer owed goes down.
- A cash sale. Debit cash; credit sales revenue. This captures both the money received and the income earned.
- The owner puts personal funds into the business. Debit cash; credit owner’s equity (or a capital contribution account). The business has more cash, and the owner’s stake goes up.
A concrete example: a client pays a $1,200 invoice. You post $1,200 on the debit side of cash and $1,200 on the credit side of accounts receivable. Cash is now $1,200 higher, the receivable is $1,200 lower, and total debits still equal total credits.
What Happens When Cash Goes Down
Spending flips the entry. You credit cash to reduce it, and you debit whatever account explains the payment. A few common patterns:
- Paying a utility bill: credit cash $500, debit utilities expense $500.
- Repaying a loan: credit cash for the payment; debit the loan payable account, plus interest expense if any is due.
- Buying supplies: credit cash for the amount spent; debit supplies or inventory.
After posting a cash decrease, check that the new ledger balance still matches what your bank or cash drawer actually shows. The IRS can impose accuracy-related penalties when underreporting or unsupported deductions lead to an underpayment, and keeping the ledger tied to real balances is your first defense.2Internal Revenue Service. Accuracy-Related Penalty
Why Your Bank Statement Says the Opposite
Here is the part that trips up almost everyone learning this: your bank statement calls a deposit a credit. That looks like a direct contradiction of what you just recorded in your own books. It is not a contradiction. It is a difference in perspective.
When you deposit $1,000, the bank now owes you $1,000. On the bank’s books, your account is a liability, and liabilities have a normal credit balance. So the bank credits your account to show its obligation to you went up. On your books, you gained $1,000 of cash, so you debit cash. Both entries are correct. They are recorded from opposite sides of the same transaction.
Withdrawals work the same way in reverse. Take money out and the bank’s obligation to you shrinks, so the bank debits your account. On your own books, your cash went down, so you credit cash. The bank’s ledger tracks what it owes you. Your ledger tracks what you own. Once you separate those two viewpoints, the wording on the statement stops looking backward.
Which Accounts Increase With a Debit and Which With a Credit
Cash is one of five broad account types, and the debit-increases rule only applies to two of them. Knowing the full pattern makes it easier to pick the right offsetting account whenever cash moves.
- Assets have a normal debit balance. Cash, accounts receivable, equipment, and inventory all go up with a debit and down with a credit.
- Expenses have a normal debit balance. Rent, utilities, wages, and supplies go up with a debit, which is why paying cash for one of them means debiting an expense.
- Liabilities have a normal credit balance. Loans payable, accounts payable, and accrued expenses go up with a credit and down with a debit.
- Equity has a normal credit balance. Owner’s equity and retained earnings go up with a credit and down with a debit.
- Revenue has a normal credit balance. Sales, service income, and interest earned go up with a credit, which is why receiving cash on a sale means crediting a revenue account.
The shortcut: accounts on the left side of the accounting equation (assets and expenses) go up with debits. Accounts on the right side (liabilities, equity, and revenue) go up with credits. Every cash transaction pairs a debit in one of these categories with a credit in another.
Fixing an Entry You Got Backwards
If you post a cash entry to the wrong side or the wrong amount, do not delete it. The proper fix is a correcting journal entry that reverses the mistake and posts the transaction correctly. That preserves the audit trail, which is a running record of what happened and how you corrected it.
Say you debited cash $500 for a customer payment that was actually $50. To fix it, credit cash $450 to remove the excess, and debit accounts receivable $450 to restore the balance you over-reduced. Cash ends up with the correct $50 increase, and the ledger shows the full story.
Reconciling your ledger to your bank statement at least once a month is what catches these errors before they pile up. When the adjusted bank balance and the adjusted ledger balance match, the cash account is telling you the truth about what you actually have.
Each cash entry should also be backed by a source document. The IRS lists sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks as standard supporting records, and requires that you keep them because they support both your books and your tax return.1Internal Revenue Service. Publication 583, Starting a Business and Keeping Records Before you post anything, confirm the date, the amount, the other party, and the account on the far side of the entry. Getting those four right the first time is what keeps corrections rare.