Why are owner withdrawals a credit to the cash account?

[John Paulson]

When an owner withdraws some of their capital / equity from the business, I understand that it is a debit to the owner capital / owner's equity account, as you are reducing the amount of that account by the amount of the withdrawal.

However, why is that transaction also recorded as a credit transaction to the cash account? I thought the cash account, comprising cash receipts and cash expenses journals, represented your outstanding cash balance? Why would you credit the cash account when you've taken money out of the business and there is no tangible (intangible, if you're being pedantic) asset on the other end associated with it?

My understanding is that cash accounts comprise two journals, cash receipts and cash disbursements respectively, so is it more a credit to the cash disbursement journal in that case then? Or have I gotten that wrong?

I believe that debits decrease an account's amount and credits increase it. Unless I'm wrong there also. Happy to be corrected

 

[Scalloway]

It is a credit to the account the money came from. So if the owner takes £100 from the till that will be a credit to the cash account. If they do a bank transfer that will be credited to Bank.

 

[MyAccountantOnline]

When an owner withdraws some of their capital / equity from the business, I understand that it is a debit to the owner capital / owner's equity account, as you are reducing the amount of that account by the amount of the withdrawal.

However, why is that transaction also recorded as a credit transaction to the cash account? ..

It's how double entry bookkeeping works - you have to have a matching debit and credit.

When cash is taken out of the cash account its a credit (which reduces the cash) to the cash account and the corresponding debit to drawings increases the total drawings.

If you only record the debit to drawings your records wont balance, you'll have no record of where the cash came from and the cash account balance will be overstated.

 

[MyAccountantOnline]

...

I believe that debits decrease an account's amount and credits increase it. Unless I'm wrong there also. Happy to be corrected

A debit will increase expenses and assets and reduce liabilities.

A credit will increase sales and liabilities but will also reduce assets and expenses.

 

[Golam Mortoza]

Cash is considered a business asset account. An owner withdrawal decreases the cash balance. In accounting, a decrease in assets is credited. So, the cash account receives a credit.

 

[Newchodge]

Cash is considered a business asset account. An owner withdrawal decreases the cash balance. In accounting, a decrease in assets is credited. So, the cash account receives a credit.

I know that. It has been explained to me many times, and I know it now. It still makes absolutely zero sense to me.

 

[Paul Kelly ICHYB]

Why are you recording to the cash account?

It comes out of the bank account and goes into your DLA (equity account).

Simple.

 

[MyAccountantOnline]

Why are you recording to the cash account?

It comes out of the bank account and goes into your DLA (equity account).

Simple.

Some businesses keep a cash account - nothing wrong with that.

The OP does refer to cash and a cash account.

 

[Paul Kelly ICHYB]

Some businesses keep a cash account - nothing wrong with that.

I get that.

Maybe the question we should ask is why are they doing it that way?

 

[neilsolaris]

When an owner withdraws some of their capital / equity from the business, I understand that it is a debit to the owner capital / owner's equity account, as you are reducing the amount of that account by the amount of the withdrawal.

However, why is that transaction also recorded as a credit transaction to the cash account? I thought the cash account, comprising cash receipts and cash expenses journals, represented your outstanding cash balance? Why would you credit the cash account when you've taken money out of the business and there is no tangible (intangible, if you're being pedantic) asset on the other end associated with it?

My understanding is that cash accounts comprise two journals, cash receipts and cash disbursements respectively, so is it more a credit to the cash disbursement journal in that case then? Or have I gotten that wrong?

I believe that debits decrease an account's amount and credits increase it. Unless I'm wrong there also. Happy to be corrected

When I was learning double entry bookkeeping many years ago, I was given the acronym PEARLS.

It stands for:

P = Purchases → Debit

E = Expenses → Debit

A = Assets → Debit

R = Revenue → Credit

L = Liabilities → Credit

S = Share Capital (Equity) → Credit


So the word PEARLS reminds you which types of accounts increase with Debits (the first three letters) and which increase with Credits (the last three).

In your example, you are decreasing the value of an asset (your bank account), therefore, that's why it's a credit entry.

 

[Bobbo]

Why are you recording to the cash account?

It comes out of the bank account and goes into your DLA (equity account).

Simple.

I think it might simply be that 'cash' is an abbreviation of 'cash at bank'.


Of course a DLA (Director Loan Account) is not a component of equity.

 

[numbersrule]

The OP mentions owner capital / owner equity which to me sounds like a sole trader business so I suspect this would have nothing to do with a DLA.

Newchodge, I do sympathise with you making no sense of withdrawals from cash being a credit. But as has often been explained double entry bookkeeping terminology is the reverse of what we all understand (mistakenly) from our use of consumer credit.

This is because when a bank or a credit card presents us with statements showing we are 'in credit' they are using the term credit from the perspective of their own internal accounting practices.

This has meant that there has been a long standing tendency for consumers to misunderstand the word credit.