Debiting a company’s cash account holds multiple meanings, depending on the user. Accountants consider debits and credits when referring to all financial accounts. Other employees consider debits and credits when referring to banking transactions. A debit to the company’s cash account impacts the balance differently whether the employee takes an accounting perspective or a banking perspective. The employee must understand which perspective he is using in order to properly understand how a debit impacts a cash account.
Cash represents the most liquid asset of any business. Companies receive payments in cash and use cash to pay their employees and suppliers. Maintaining a positive cash balance is essential for the success of any business. For some users, debiting the cash account represents an increase in cash. For other users, debiting the cash account represents a decrease in cash.
Banks use the terminology debit and credit to describe their actions with regard to their customer accounts. Businesses deposit money into their cash account at the bank and use those funds to make payments. When the bank deposits money into the business account, it uses the term credit to describe the action. If the bank subtracts money from the business account, it uses the term debit to describe the action. The bank may debit an account when a check clears the account, when an automatic payment is withdrawn or when the customer uses her debit card. In banking terms, a debit to the cash account represents a decrease.
Accountants use the terminology debit and credit to describe the actions that occur with a company’s cash account. This terminology, from the accounting perspective, holds the opposite meaning as it does in the banking terminology. If the customer deposits money into the bank account, the accountant uses the term debit to describe the action. If the customer withdraws money from the bank account, the accountant uses the term credit to describe the action. The accountant may record a debit to the cash account when the account earns interest or a deposit is made. In accounting terms, a debit to the cash account represents an increase.
Because of the confusing nature of the term debit when referring to a cash account, individuals must clarify their perspective when discussing the cash account. In written or oral communication, the individual should state whether he is referring to an accounting debit or a bank debit.