Source vs. Use
Simply put...
A source of Cash resulted in an increase to the Cash account balance.
A use of Cash resulted in a decrease to the Cash account balance.
...however, this varies dependent on a given transaction dealt with an Asset or Liability / Equity.
Let's utilize the following portion of this Cash Flow Worksheet to learn the difference!
Asset
If the asset balance is decreasing, it's a source of Cash.
If the asset balance is increasing, it's a use of Cash.
The following line in our Cash Flow Worksheet states we had a Source of Cash with the Accounts Receivable asset account.
Why is this the case? Well, our Accounts Receivable asset account balance went from $500 (Last Month) to $0 (This Month)...
...due to a journal entry dealing with Cash.
For example, let's say a customer came and paid off $500 worth of payment on credit they made a month ago. This would result in a journal entry like so:
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $500 | |
| Accounts Receivable | $500 |
And, as we can see in this journal entry, it increased our Cash account balance by $500! A.k.a... it was a source of Cash!
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $500 | |
| Accounts Receivable | $500 |
The following line in our Cash Flow Worksheet states we had a Use of Cash with the Equipment asset account.
Why is this the case? Well, our Equipment asset account balance went from $0 (Last Month) to $500 (This Month)...
...due to a journal entry dealing with Cash.
For example, let's say that we purchased a new lemon squeezer for $500 for our lemonade stand, resulting in a journal entry like so:
| Transaction | Debit | Credit |
|---|---|---|
| Equipment | $500 | |
| Cash | $500 |
And, as we can see in this journal entry, it decreased our Cash account balance by $500! A.k.a... it was a use of Cash!
| Transaction | Debit | Credit |
|---|---|---|
| Equipment | $500 | |
| Cash | $500 |
Liability or Equity
If the liability / equity balance is decreasing, it's a use of Cash.
If the liability / equity balance is increasing, it's a source of Cash.
The following line in our Cash Flow Worksheet states we had a Source of Cash with the Notes Payable - Long Term liability account.
Why is this the case? Well, our Notes Payable - Long Term liability account balance went from $0 (Last Month) to $1,500 (This Month)...
...due to a journal entry dealing with Cash.
For example, let's say we took out a note from our local bank for $1,500, and in-turn gained $1,500 in Cash. This would result in a journal entry like so:
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,500 | |
| Notes Payable - Long Term | $1,500 |
And, as we can see in this journal entry, it increased our Cash account balance by $1,500! A.k.a... it was a source of Cash!
| Transaction | Debit | Credit |
|---|---|---|
| Cash | $1,500 | |
| Notes Payable - Long Term | $1,500 |
The following line in our Cash Flow Worksheet states we had a Use of Cash with the Wages Payable liability account.
Why is this the case? Well, our Wages Payable liability account balance went from $500 (Last Month) to $0 (This Month)...
...due to a journal entry dealing with Cash.
For example, let's say we paid our employees $500 in wages we owed them from the previous month. This would result in a journal entry like so:
| Transaction | Debit | Credit |
|---|---|---|
| Wages Payable | $500 | |
| Cash | $500 |
And, as we can see in this journal entry, it decreased our Cash account balance by $500! A.k.a... it was a use of Cash!
| Transaction | Debit | Credit |
|---|---|---|
| Wages Payable | $500 | |
| Cash | $500 |
(We'll get into Source vs. Use with Retained Earnings when we learn about Breaking Apart.)