Moving particles in the clouds build up static electricity. This same static electricity can be observed when walking on synthetic carpet and touching a metal object or another person.
This build up of charge eventually gets great enough so that it is released as electricity back to the Earth. This causes surrounding gasses to become ionized and thus becomes plasma (one of the states of matter).
Electricity is the transfer of electrons between molecules; for example, a battery sends these tiny particles from its negative end to its positive end. If an electrical current does not have a sufficient "load," or job to perform, along its path then it short-circuits and makes a popping noise accompanied by intense heat (which was the electrical energy that went unused and had to be disposed of somehow). The earth and its atmosphere are essentially a gigantic battery; when a path is formed in the air which can carry a current, the battery shorts and we call the resulting flash lightning.
To answer the original question, however, it can actually start in either the ground or a cloud. It should also be noted that the above explanation is somewhat oversimplified. For more details, see the related Wikipedia link.
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