What is Cash?

Cash is legal tender—currency or coins—that can be used to exchange goods, debt, or services. Sometimes it also includes the value of assets that can be easily converted into cash immediately, as reported by a company.

In economics, cash is money in the physical form of currency, such as banknotes and coins.

In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of money market accounts). Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets.

What does cash mean? Best Definitions of Cash

Cash definition:

  • Money in the form of bills or coins; currency.
  • Money paid in currency or by check.
  • The definition of cash is currency and coins, or the money a person has on hand.
  • Liquid assets including bank deposits and marketable securities.
  • To exchange for or convert into ready money.
  • Any of various Asian coins of small denomination, especially a copper and lead coin with a square hole in its center.
  • Money that a person actually has, including money on deposit; esp., ready money.
  • Bills and coins; currency.
  • Money or its equivalent, as a check or money order, paid at the time of purchase, as opposed to credit.
  • Money in the form of notes/bills and coins, as opposed to cheques/checks or electronic transactions.
  • Cash means to exchange, give, get or convert something for coin or currency.

Understanding Cash

Cash is bills, coins, bank balances, money orders, and checks. Cash is used to acquire goods and services or to eliminate obligations. Items that do not fall within the definition of cash are post-dated checks and notes receivable. Most forms of cash are electronic, rather than bills and coins, since cash balances can be stated in the computer records for investment accounts.

Cash is listed first in the balance sheet, since the reporting sequence is in order by liquidity, and cash is the most liquid of all assets. A related accounting term is cash equivalents, which refers to assets that can be readily converted into cash.

A business is more likely to retain a large amount of cash on hand if it routinely deals with cash transactions (such as a pawn shop), and is less likely to retain much cash if it has an excellent cash forecasting system and can therefore invest in more illiquid but higher yielding investments with confidence.

Cash is assumed to be stated at its fair value at all times.

What You Need to Know about Cash…

Cash has been used for as long as goods and services have been exchanged. Its form varied from country to country, depending on the culture in which it was used. Early civilisations used seashells, sugar, salt and other commodities of weight as payment means. As time passed by, many nations switched to coins struck from precious metals, including silver, gold, bronze and copper.

As the world economy developed and silver supplies increased due to the colonisation of South America, coins became larger, and a standard coin for international payment was finally developed.

In the early 17th century, English East India Company coins were minted in England and shipped to the East. Over time, the word “cash” was adopted from Sanskrit.

Meanwhile, paper money was developed. In the 18th century, important paper issues were made in colonies like Ceylon and the bordering colonies of Essequibo, Demerara and Berbice. The ability to create paper money made nation-states responsible for the management of inflation through control of the monetary supply.

It also made a direct relation between the metal of the coin and its denomination unnecessary. From 1816, coins have generally become token money.

In modern times, cash consists of banknotes and coins, whose metallic value is rather negligible. This modern form of cash is referred to as fiat currency.

Presently, cash has become a very small part of the overall money supply. Its remaining role is to provide a form of currency storage and payment for those who don’t want to take part in other systems.

Most cash these days is in electronic form, despite our attachment to the idea of banknotes and coins. Online banking, smartphone payment technology, checks, debit cards and credit cards have decreased the need for people to carry physical cash in any form. The concept of a “cashless society,” is the idea that in the future cash will be redundant and fully replaced by electronic means of transaction.

Where Does Cash Come From?

Cash is created from the sale of goods or services. It can also come from investors, personal funds of directors or owners, or can be loaned from a bank.

As the simplest method for exchanging payment for goods or services, cash provides a fast, reliable, and uncomplicated way to complete a transaction. It’s also a useful asset because it retains market value over time.

Cash flow provides an outline of the incoming and outgoing cash within a company and is an important part of managing business finances. This information is used to form a cash flow statement, a crucial document for potential investors.

Accounting Example

Cash is recorded as a current asset on the balance sheet. Even though cash can be saved for future periods, it is still considered a current asset because it can because it can be used in one period. Long-term assets like vehicles cannot be completely used during one accounting period.

Since balance sheets display current and long-term assets in order of liquidity, cash is always the first item on a balance sheet. Many times companies combine cash and cash equivalents on the balance sheet. Since cash equivalents are closely related to cash, the true meaning of the cash account is not distorted on the balance sheet.

If a company overdrafts its checking account, it technically has no cash and actually owes the bank money. In this case, a negative cash balance is usually not displayed as a current asset. Instead a cash overdraft is presented as a current liability.

Cash in Business Operations

Cash is the lifeblood of a business. For a company to cover its operating expenses, it needs to have sufficient money on hand to pay its employees, contractors, vendors, and suppliers. Companies also need money to fund capital expenditures and invest in long term growth projects.

If companies don’t have enough cash on hand, they may need to finance their OpEx and CapEx by borrowing money (debt) or issuing shares (equity).

Cash Accounting

Cash accounting is the methodology under which transactions are recorded when they actually happen. For example, income will be recorded when the company receives cash and expenses are recorded when they are actually paid out and not when the bill is raised.

There are two basic type of accounting methodologies – one is cash accounting and the other is accrual accounting. Both systems have their own benefits. Cash accounting is beneficial for small companies or organisations and for complex organisational structures accrual accounting is better.

Cash accounting is a system where revenues as well as expenses are realised when they are received or paid out in case of an expense. It is fairly easy to use methodology. Let’s understand it with the help of an example.

If your company ABC receives an order to supply 10 computers on October 10, but you deliver the goods in November, the sale will be recorded in the month of November only and not in the month of October.

Your firm ABC receives cash of Rs 1,00,000 for the sale of 10 computers from company XYZ on November 10. The accountant will record the transaction of a sale on November 10 only, and not on October 10.

Companies record expenses when they are actually paid out. Let’s understand the concept with the help of an example. If your company hires a contractor on November 1 and a bill is raised on that day, but the actual money was paid out on November 15.

Under cash accounting, November 15 would be the date when the transaction will be recorded and not November 1st.

This method is usually used by sole proprietors who have small, cash-based business or are involved in providing service to customers.

Characteristics of Cash

Cash has specific characteristics that can distinguish it from other assets in the company.

Here are the characteristics of funds that you need to know:

  1. Highly liquid corporate assets;
  2. The most common standards of exchange;
  3. It can be the basis of calculations as well as the measurement of values.

Source Cash

So how can you get money? Here are the sources of money receipts in a business/company:

  1. Obtain funds through the sale of investments;
  2. The existence of shares issue or capital additions by the owner of the company in money;
  3. There is a decrease in current assets other than money that receives funds offset by the receipt of receivables, the sale in money, and else.;
  4. There is the issuance of debt securities, both short-term (money orders) and long-term debt (bonds, mortgages, and else.) and increased debt with the receipt of offset funds;
  5. Cash receipts due to interest, rent, or dividends from investments, donations, or gifts or the receipt of tax payments in the prior period.

Cash in Financial Statements

Cash plays an important role in the financial statements of a company. On the balance sheet, it appears as the first item at the top since it’s a company’s most liquid asset. Companies often include “cash equivalents” in this category, which are money market funds and other short-term investments that are easily convertible into cash.

To reconcile the changes in an amount over a period, accountants prepare a statement of cash flows, which shows all money that was generated and consumed by a business, ending with the net change in money at the bottom.

What Includes Cash and What Doesn’t?

Recognize the groups that do and do not fall into the money category, namely:

Including cash

  1. Cash. These are paper and metal real money that applies to payments.
  2. Travel cheque. It is a cheque that commercial banks issue; its use can serve customers who want to travel or travel in a particular time with a long distance.
  3. Cashier cheque. Similar to travel cheques that are both commercial banks as makers, there are only different purposes: serving other parties.
  4. Postal money order. It is a document that can be used as money.
  5. Cheque. It is a document that the company can receive as payment from another party.
  6. Company money. That is the company’s money stored in the bank that the company can take at any time.

Excluding cash

  1. Term deposit (time deposit) is a deposit in a bank that can only be liquid within a certain period;
  2. Stamps;
  3. Money that has been available for a particular purpose leads to its use being bound. An example is a pension fund;
  4. Cheque back (post date cheque) is a category of funds that you can not consider money before the time comes.

Types of Cash

Cash is divided into sections. Each part of the treasury aims as supervision and examination related to the distribution of money flows.

You can find cash sharing in accounting ledgers.

While the funds on the financial statements have become one, the use of cash financial statements can be easily understood by others, even if they are novices.

The types of money are divided into, among others, small money, money in banks, money reporting, money equivalents, restricted money, and bank overdrafts. Check out each of his explanations, namely:

Petty cash (Small cash)

Petty cash is money that the company prepares to pay various expenses with a relatively small value and is uneconomic when making payments by check.

Cash in the bank

Cash in a bank is a form of corporate money deposited in a particular bank account. The amount of money in the bank tends to be significant. It requires higher security, so it is not possible to make transactions directly because the amount is large and vulnerable in terms of security.

As a form of security and transparency, funds in the bank will always be related to the company’s bank account.

Cash reporting

Companies can do cash reporting directly. However, often the implementation can occur some problems, including:

Cash Equivalents

Cash equivalents are a combination of company assets that have a maturity of fewer than three months. This money is beneficial for their use when the company’s financial condition is complex or unstable.

The simplest examples are the Sovereign Debt Securities and treasury bills.

Restricted Cash

Understanding of restricted cash is money that companies deliberately separate to pay off significant future obligations.

Bank Overdrafts

Bank overdrafts mean the company is issuing checks that are worth more than the balance in the bank.