Lesson 6: Transfers Between Asset Accounts
Debits & Credits
Assets are the driver of the golden rule. While equity is extremely important, it's the assets that drive the equity. Think about it, Equity (Net Worth) = Assets - Liabilities... the higher the asset value, the higher the equity value. As the anchor of the golden rule, all roads essentially start and lead back to asset accounts, so we will take a look at all of the common asset to asset account transfers. Each example will show what accounts get debited or credited, plus the up or down impact of each.
Since all examples below are transactions between asset accounts, none of them change your bottom-line asset value. This means none of them change your Net Worth either. Remember, Net Worth = Total Assets - Total Liabilities, so if a transaction does not change your bottom-line asset value then it does not change your Net Worth either. In other words, if you have $100 cash to your name and $0 debt then your Net Worth is $100. If you then deposit that cash into your Checking Account (an asset account to asset account transaction), your Net Worth is still $100.
Depositing Cash into Checkings/Savings or
Withdrawing Cash from Checkings/Savings
This figure describes what happens on your Balance Sheet when you go to the ATM to deposit cash to or withdraw cash from your Checking Account or Savings Account. One account gets credited (decreased) and the other gets debited (increased) by the same amount.
Remember, these accounts are running trackers containing all transactions that affect the account:
This is an example of your Checking Account for the first half of January after a series of deposits and withdrawals at the ATM. Since debit entries increase asset accounts and credit entries decrease them, the deposits go down as as debits and the withdrawals go down as credits. The debit column is totaled then the credit column is totaled and the difference represents the current account balance. Since the total of debits, $1,040, exceeds the amount of credits, $250, the final account balance is positive $790.
Important Note 1: For every debit entry in Figure 6B there is a credit entry in the Cash Account not being shown (the Cash Account decreases when you deposit cash into your Checking Account). Likewise, for every credit entry there is a debit entry not shown in the Cash Account.
Transferring from Savings into Checkings
& vice versa
This figure describes what happens on your Balance Sheet when you transfer money between your Checking Account and Savings Account. Again, one is debited (increased) and the other is credited (decreased) by the same amount.
Transferring from Venmo/Cash App (or Paypal) into Checkings/Savings
& vice versa
This figure describes what happens on your Balance Sheet when you send money to and from the popular fin-tech platforms Venmo, Cash App or Paypal. It is important to note that any balances you have in these accounts are factored into your bottom-line Asset value. Therefore transferring money into these accounts does not decrease your Net Worth; they are not losses despite the loss in your Checking Account. The loss will be incurred if you actually use the Venmo funds to buy something.
When you use Venmo or Cash App to pay your friend for something, you may think of it as just one transaction (Checkings -> Friend). However, it is actually two transactions in your books; the first being the asset to asset transfer (Checkings -> Venmo) and the second is the actual expense (Venmo -> Friend). The same result, I know, but I am here to teach you the actual mechanics!
Transferring from Checkings/Savings into an investment account
& vice versa
This figure describes what happens on your Balance Sheet when you send money to and from an investment account. These generally include brokerage accounts for stocks (like Robinhood or eTrade) and retirement accounts such as IRAs and 401ks.
Important Note: Transferring money into an investment account is not a loss to Net Worth despite the loss in your Checking Account. Similar to the previous Venmo/Cash App example, the transfer itself is not a loss; it has no affect on your Net Worth since it is a transaction involving asset accounts only. The gain (Income) or loss (Expense) is incurred once the stocks, or other type of investment security, go up or down in value.
This concept usually helps non-investors to be less intimidated by stocks and actually participate in the market. Yes, you are losing the money in your bank account but you are not necessarily taking a loss. You are exchanging an asset for an appreciating asset which is the name of the game! If you are a non-investor or beginner to stocks, check out my twitter thread explaining the stock market using shoes as an example. I hope it helps!
Transferring from Checkings/Savings into a Bitcoin/crypto wallet
& vice versa
This figure describes what happens on your Balance Sheet when you send money to and from a cryptocurrency account (better known as a digital wallet). Since crypto is technically an investment, everything I said about the previous section applies here as well.
Transferring from Checkings/Savings into a gambling account
& vice versa
This example describes what happens on your Balance Sheet when you send money to and from an online gambling account. Whether its a fantasy sports site like Draft Kings or an online poker site, you own the balances in those accounts. Therefore, they are included in the bottom-line asset value on your Balance Sheet and corresponding Net Worth. However, some lenders may choose to ignore these accounts when they analyze your assets. If your Net Worth is $100,000 and you have $1,000 in a Draft Kings account, it's not a material amount and can be easily over-looked. However, if you have $10,000 in there, it may be factored (or you could just temporarily transfer it to your Checking Account).
Important Note: Many people will never even have a gambling account in their lifetime, while some may use these accounts weekly. It just goes to show that Net Worth variables vary by individual but the formula used to calculate it never does.
Transferring from Checkings/Savings into an Escrow account
& vice versa
An Escrow Account is an asset account held by homeowners, used to pay expenses like insurance and property taxes. With each mortgage payment you pay, a portion goes towards the loan (reducing debt) and another portion goes towards interest (expense). Another portion goes into your Escrow Account and the balance increases each month. Then when your property tax bill comes in, your lender (bank) uses your Escrow Account to pay the taxes on your behalf. This ensures your taxes are always paid on time and efficiently. The lender also uses your Escrow Account to pay any mortgage insurance (PMI) you may owe.
I go into great detail on all of these things in a later lesson, but for this current lesson you just need to understand that the Escrow deposits are transfers between Asset accounts and you own whatever balance is in your Escrow Account. Therefore, it is a part of the bottom-line asset value on your Balance Sheet. Since property taxes are paid quarterly or bi-annually but your Escrow deposits are made monthly (with your mortgage payment), it is possible for your Escrow Account to grow to a material amount prior to being depleted. If you sell the home with a balance in your Escrow Account, you get those funds back (minus unpaid taxes owed).
The transactions represented by these seven examples are common transactions for 99% of the general public. Common examples that you are probably already familiar with from your own life. See, I am not reinventing the wheel with any of this. I am only trying to change your mindset and give you a new vocabulary to describe the financial world you already participate in. My hope is that the next time you transfer money into Venmo, you think about your Checking Account being credited and your Venmo account being debited.
Think of it like the concept of math vs math education. Math does not exist because we understand it; we understand it because it exists. 1 + 1 has always equaled 2, long before the science of math was a thing and humans put concepts to the facts. For example, you knew a square was a shape with 4 equal sides before high school, but your geometry teacher helped you understand the composition of 90 degree angles and symmetry (plus the many real-world applications that come with the understanding).
Similarly, you have a personal finance accounting & bookkeeping system whether you know it or not. It is my "job," like a math teacher, to teach you the language to these technical concepts you already vaguely understand. "Think like an accountant, maximize your Net Worth!"
Click here to continue to the next lesson on debits & credits for equity accounts.