 Hello, in this presentation, we will discuss the discussion question of, why is cash a debit balance and revenue a credit balance? This is a common type of essay question really getting at that idea of what debits and credits are, once again, but asking in a way that can get us thinking about this topic a bit more because people always often get these two mixed up, meaning we get the debits and credits mixed up when we're thinking about the cash and revenue accounts, and there's a few different reasons as to why that is the case. So if we were to see a question like this, we may want to start off with just picking up as many points as we can by just defining the terms, which will be a fairly simple task to define the terms, and then once we've defined them, it might help us to start thinking about these types of things so that we can expand on our answer and give the similarities and differences in terms of what debits and credits are, why accounts go up and down, and which accounts would be increased or decreased when we're thinking about revenue and cash specifically. So first we might want to define these, so if we were to define cash and revenue, and then debits and credits, cash is the first place to start because we know that cash clearly is going to be an asset account, we usually learn cash first, it's going to be our major, most liquid type of asset account, and normally asset accounts, we just have to memorize this, you might want to just memorize this and have the cheat sheet in front of you until you get it, asset accounts have normal debit balances. So we can list that out and we can just define cash, we can then define revenue, a concept that is a bit more abstract, it seems like it would be straightforward, we've all heard the term revenue, but it's a bit more abstract of a term because it's not something tangible as cash typically is, even cash isn't tangible these days, a lot of it's in the computer system and it's just a number in a computer system, but we can at least visualize cash as something tangible. Revenue really represents the process of us earning something, even if we haven't yet been paid for it. So revenue really represents the value of our work, and the value of our work is usually measured in dollars, but does not necessarily represent that we have received those dollars yet, and we could of course get paid with something else. So note that revenue is the value of earning something, revenue if we were to define revenue, it's not going to be cash, and that's really the first place that people get messed up because we tend to define revenue as cash. So if we start to define these two terms, that's really when we might first get into the distinguishing factor and say, oh well there's got to be something different between cash and revenue when we define these two things, and revenue is not cash, revenue represents the earning of something. So if we did work then we have earned revenue. If we had an agreement that we were going to do bookkeeping work and someone was going to pay us, whether we got the cash in advance, got the cash in the future, or at the same point in time, we've earned the revenue at the point in time, not when we shook hands, not when we got the agreement, but when we did the work, we have earned the revenue. In terms of a W2 employee, we've earned revenue at the point in time that we were working in our job, even though we may not get paid till a later date when the payroll rolls around. So once we have those differences down, then we can really go into debt with the credits and say, okay why would one be going this way and the other that way. Also note that you just kind of have to memorize that revenue has a credit normal balance, and all you can do is just get that's just part of the game that you just have to memorize. So you want to have your cheat sheet there until you get that memorization down and know that revenue has a credit normal balance. And revenue only goes up as well, because typically we only do work. It's not like it's not like we can do negative work and earn negative revenue. So there could be exceptions down the line, you know, but almost 99% of the time revenue is going to increase. Then we're going to have debits and credits, and we can define those. And this is another area where typically people get mixed up. Debits just means it's going to be the amount on the left hand side of the T account or ledger. Credits just mean it's going to be the amount on the right hand side of the T account or ledger. It doesn't have any more meaning than that. And no matter how many times again, how many times we learn that when we when we start learning this stuff, we always want to put more meaning than that into these terms, because we've heard them so many times. We've heard people say they're going to credit our account or we're going to buy something on credit. And so for us to just define something as a debits just the amount on the left and the credits just the amount on the right seems like not sufficient to many people when defining debits and credits. Note, however, that when you do when you're doing the financial statements, that's all it is, because we're really just looking at the board. We're looking at just like a checker board. All the debits and credits are like the red and black squares on the board. They have no meaning. They're not good or bad. They're not increased or decreased by their nature. They're just squares on the board, or in this case columns on the chart, that chart being a T account. And note that all these other terms we could divide we could like kind of derive all these other terms, such as if someone says they're going to credit their account or where did a credit card come from or what's a debit card. We could go back and try to derive those terms from accounting and see what their origins are. And obviously those terms have now morphed into something more than than just the left hand right hand side. So it's not wrong to think in those contexts of debits and credits meaning more than just the left and the right or at least having you know their their origins are still just the left and the right, but but they mean more than that now. So again, you just got to think of those in different contexts. Now they have these words have different meanings. So for this for this context, you don't want to have any more meaning other than that. The debits are on the left, the credits are on the right. Once we know that, then we can we can try to define why is cash a normal debit balance and why is revenue a normal credit balance. And this is a bit of a trick question because there's no there's no actual kind of like inherent reason as to why why there's a normal balance to a debit, why a normal balance of revenue is a credit. But in terms of setting up the system, there is a reason on why that kind of has to be. So first, why is cash have a normal debit balance? Because that's that's the way the system was set up. That's pretty much that's pretty much it. Why is revenue have a normal credit balance? Because that's the way the system is set up. However, why are the two different? Why are they opposites? That's pretty much out of necessity. That has to be the case. And the reason for that is that if you think about it, this the double entry accounting system is always going to have an equal number of debits and credits. And therefore, whenever we record something, everything has to balance out. So if we were to record something like receiving cash and for work that we did, there's nothing bad about that transaction. We got money and we earned revenue at the same point in time. The whole transaction is good. But when we record it, we know we need to have a debit and a credit. And therefore, we need to record something with a debit that's good and something with a credit that's good. And so what the system was set up to do is say cash is going to have a normal debit balance. In order to make it go up, we're going to do the same thing to it, which is another debit. So we would increase the asset account with a debit. And then we need to credit something. And we're going to credit revenue. So revenue is going up revenue has a normal credit about count amount. And it always goes up in the credit direction. So if you think about it, then the whole journal entry is good, but we need a debit and a credit. The debit's going to cash, the credit's going to revenue. Note that although the debits and credits have no real meaning there, they were just chosen arbitrarily that cash assets would have normal debit balances and revenue would have normal credit balances. Although that's the case, we can kind of start to see that on the balance sheet note, we kind of like things that have normal debit balances, meaning we like the cash, we like the other assets, they have normal debit balances, they go up with debits and down with credits. And on the income statement, it kind of tends to be the reverse, meaning we tend to like the credit stuff, the revenue going up in the credit direction is good. And we tend not like the debit stuff, like the expenses. So note that again, you don't want to assign meaning, you don't want to say that debits are good and credits are bad or debits are good on the balance sheet and credits are good on the income statement. But if it helps to just memorize in your head like which way things are going, that's one reason that this happens to be the case, meaning a journal entry like recording cash received for work needs a debit and a credit. And therefore both the debit and credit will be good. The assets tend are happened to be debit balance accounts which go up with debits, revenue happens to be credit balance accounts which go up with credits. If we think about the other side of the transaction, just to just to see what happens on the on the expense side notes that on the liabilities, if we were to have an expense or we purchase something like auto expense on account, meaning we got auto expense and paid on account like accounts payable, then note the debit would go to an expense auto expense and the credit needs to go to the accounts payable. Neither of those accounts do we like we don't like having to record an expense having an auto expense and we don't like the fact that we owe money in the future for that expense that we consumed. But we still need a debit and credit. So in that case, both the debit and the credit are bad. So in that case, the expense accounts always have debit balances. They always go up in the debit direction and we tend not to like that debit because we're debiting the expense decreasing net income and the credit is also bad. That's going to a liability account. That liability account of accounts payable. It's going up meaning we owe more money. So in that case, the credit is something we don't tend to like. So on the other side of things, note that on the balance sheet, we tend not to like the credit balance accounts. We don't like the liabilities liabilities go up with a credit and on the income statement, we tend not to like the the debit balance accounts because the expenses go up with debits and that decreases net income. So in essence, if we were to be asked a question like this, first it might be best to define the terms starting with cash. That'll get you thinking about what's going on here. Then I would define revenue and try to look for those differentiations between cash and revenue. You should be able to distinguish what the differences are between those two. Then define which of those accounts have normal debit and credit balances and just list that it is a normal debit and credit balance. And then you could go forward and list how that account would go up or down just in terms of the rules meaning cash as a normal debit balance would go up with a debit because like things make it go up and opposite makes it go down. It then would go down with a credit. Revenue being a credit normal balance would go up with a credit because the same thing would make it to go up down with a debit because the opposite would make it go down. However, revenue typically only goes up. It does not generally go down. And then you can kind of expand on that and get into why why cash would be a debit or credit or why you know cash what has to be at least the opposite of revenue or have the opposite normal balance the way the system is set up. It has to be that way and you can list some journal entries. Typically the journal entry to to quote then or to look at and analyze would be receiving cash for work done in the same period which would result in a debit to cash and a credit to revenue write down that journal entry and then explain well why does it have to be that way. Well if cash is going up the other side has to be going to something so they have to basically be opposites. You can kind of go into the thought process and analyze that type of journal entry as to why the debits are cash cash is a normal debit and why the revenue has a normal credit balance.