Your Cash and Your Bank Statements.
In bookkeeping, Cash is an “asset” and assets are always a debit on the books while the money you spend credits cash and debits the expense. Many people unfamiliar with bookkeeping and financial jargon believe cash should be a credit because after all, the bank statements they get show deposits as a credit. How can this be?
When you have cash in your checking account, to you, this is a debit, an asset but honestly, when you deposit said cash into the bank, even though you can spend it as desired or required, in effect, you are loaning this money to said bank for safekeeping and said bank uses the money you have placed within it’s trust for loans, investment activity and the like. When you deposit money into your bank, you become a creditor of the bank. On the banks financial records, that cash becomes a debit for them and you become a creditor, they owe you.
As liabilities (things you owe, loans, notes payables, sales tax payable, payroll tax payable, etc.) are credits on your own financial statements, you become a credit on the banks financial statements. Your financial statement may look like this:
Cash in bank – 5,000.00 (debit) Sales – 4,587.50 (credit) sales tax payable 412.50 (credit)
and on your bank’s financial statement this transaction may look more like this
Cash 5,000.00 (debit) Note Payable (Your name) 5,000.00.
When your bank issues a monthly bank statement to you the deposits (money you deposited) shows up as a credit and the money you spend shows up as a debit. This is the opposite of what your own financial statement looks like, so why? Well, when you made the deposit, you became a liability to the bank. Your cash is now their cash yet they owe you, so when they issue a statement, they reflect the cash they owe you as a credit on the bank statement because you are their creditor, the one they owe this money to and for the money you have spent that month from ach payments, checks, debit cards and the like reflect as a debit to them because this reduces the amount they owe you and instead they have taken those amounts and paid them out to whomever you have directed with the writing of checks, use of debit cards etc. and they now owe you less.
Assets-Liabilities=Equity. This is the basic financial formula for bookkeeping. The bank uses the same formula as do we all and the statement they send you would be a reflection of their own financial statements, ie., your cash becomes their cash and you become their creditor. The same basic thing as you going to the bank and getting say a line of credit from the bank. When you draw on that credit and take money, that money becomes your cash, a debit on your books and the bank becomes a creditor, like note payable/ line of credit. The money was theirs but they have loaned it to you to use according to your needs. Only real difference here is that you signed a note agreement with said bank upon taking advantage of that loan. When you set up a checking account with your bank that loan situation is not quite the same. The protection you have then becomes in truth, the FDIC insurance on your deposits. Get familiar with how much insurance is available and ensure you are very careful crossing that limit especially in todays upheaval.
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