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Is an asset a debit or credit?

I get so confused when trying to remember which accounts are debits and credits, especially with assets. Is an asset a debit or a credit? Can it sometimes be both?

Also, are all assets on the same side or are they sometimes different? I think "cash at bank" may be different to the other assets. I know when I have a deposit into my bank account it is "credited" and direct debits are payments that go off my account. Does that mean "cash at bank" is a credit?

Thanks.

Posted in Business & Commerce, asked by lefe, 4 years ago. 2341 hits.

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Assets are by nature debits. That means that their usual side is the debit side. As with all other Balance Sheet accounts however, such as equity and liabilities, they can affect both the debit and the credit side.

Asset accounts increase on the debit side and decrease on the credit side. This means that when an asset is acquired or purchased, the transaction is records on the debit side. When the asset is disposed of, settled or sold, the transaction is recorded on the credit side.

Some examples of asset accounts are: Cash at Bank, Motor Vehicles, Land and Buildings, Intangible Assets, Accounts Receivable, Prepaid Expenses, and Accrued Revenue.

Cash at Bank works the same as all other asset classes. It does become confusing to many people when they consider their own bank statement. It is important to remember that the bank sends you a statement which reflects your account in their records. Essentially, if you have a deposit with them, you are their creditor i.e. they hold a liability account with you are they "owe" you the money whenever you choose to withdraw it. As such, when you make a deposit, it is a credit for them as they "owe" you more than before. When you make a payment out of your account or withdraw cash, this is a debit for them as they are in essence settling amounts that they owe you i.e. your account balance is lower therefore the "owe" you less.

That is why deposits into your account are called credits. This is from the bank's perspective. If you had to keep a record of your own accounts, you would debit Cash at Bank for any deposits received and credit for any withdrawals or direct debits which go off your account.

Have a look at the following example:

Purchase a motor vehicle on 1 May 2013 from Keeva Motor Group for $23,999. A 20% deposit is required with the remainder being financed by a bank loan over 5 years.

A motor vehicle is an asset. When you purchase the vehicle, that asset increases i.e. you have more vehicles than you had before the transaction. This is therefore a debit.

You also have cash at bank to consider as you are putting down a cash deposit. Cash at bank is also an asset, however it is decreasing as money is flowing out due to the payment. This is therefore a credit.

The final account is the bank loan which is a liability. It is increasing as you owe more than you did before the transaction. Liabilities increase on the credit side, therefore this is a credit.

The journal would look as follows (ignoring the effects of GST):

Motor Vehicles (dr) $23,999
Cash at bank (cr) $4,800 [20% dep]
Bank Loan (cr) $19,199
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4 years ago
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