Cash Equivalent Assets: Definition, Types, Purpose, and Their Functions in the Business World

Definition of Cash Equivalent Assets – Cash equivalents are assets owned by businesses. These are short term investment assets that can be converted into cash in a relatively short period of time.

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Cash equivalents are liquid investments. Cash equivalents are assets that can be converted into cash without reducing their value. Short term investment under 12 months. This can be converted to rupiah for a certain amount.

Cash equivalent assets are all types of money, both paper money and coins. And applied at home and abroad. And every correspondence worth rupiah.

Understanding cash equivalents is a must for every entrepreneur. For this reason, this article will explain what cash equivalents are, their types, uses, characteristics, advantages and disadvantages.

Definition of Cash Equivalent Assets

Cash equivalent assets are short-term investments that can be quickly converted into cash. Examples include savings and checking account balances, short-term certificates of deposit, and short-term government bonds. Another example of cash equivalents is short-term securities ( negotiable notes issued by other entities).

Cash equivalents are a measure of a company’s financial position. Investors are advised to be aware of a company’s cash equivalents when deciding whether to invest in another company. This is because it lets investors know whether the company can pay its bills in the short term.

Cash equivalents are one of the most important indicators of the health of a company’s financial system. Analysts consider which particular company would be a good place to invest given its ability to generate cash and cash equivalents as it reflects how the company can pay its bills in the short term.

You can also determine if any companies with large amounts of cash and cash equivalents are prime targets for large companies planning to acquire small businesses.

When presented in financial statements, investing in this type of account is often equated with cash. Therefore, cash equivalents include investment vehicles that are similar to the entire cash balance of the enterprise.

Types of Cash Equivalent Assets

1. Currency

Currency is a unit of currency agreed upon by the government and citizens of a country. Countries have their own currency. For example, Indonesia’s currency is Rupiah, Japan uses Yen, and several countries, namely the United States, Cambodia, Ecuador and Panama, have the same currency.

Currency itself acts as a medium of exchange, and all currencies have denominations. For example, 1 USD is equivalent to 14,000 Rupiah in Indonesia. This is subject to exchange rates or currency exchange rates. This exchange rate can generally change at any time as the US dollar rises.

In addition, the exchange rate is also affected by the country’s inflation rate. Inflation is lower in more affluent countries. This right stems from the economic and political situation of the country. The political and economic situation of a country also affects exchange rates. Government control also contributes to exchange rate fluctuations in currencies.

2. Check

A check is a letter printed by a bank that a customer can use as an order to withdraw money. The amount to be deducted will be stated on the check itself. A checking account is required to receive checks. The checking account itself is a savings or deposit account for a customer or business person. You can also withdraw money at any time during bank opening hours.

Withdrawing money by check is not as easy as it sounds. There are several conditions for using checks. That is, the check name must be unique. The designation of the name of the prospective buyer and the location of the transaction must include the date of cashing of the check. Checks are valid for six months from the date the check is presented. There are various types of checks namely, blank checks, bearer checks, checks made on behalf of other people, and many other checks.

3. Bank Deposits

Bank deposits are deposits made by customers and have a certain time during which withdrawals can be made. If the customer withdraws before the specified time, the customer will be penalized by the bank.

There are many types of deposits, such as time deposits, certificates of deposit and deposits on call. Time deposits are deposits that have a choice of certain terms, such as 3 months 6 months 1 year to 2 years. While the certificate of deposit does not have the name of a person or an institution.

Because this certificate can be transferred later. You can also sell to other parties. And the interest from this deposit is given every month or at maturity. Deposit on call is a savings account with a minimum term of one week. This deposit is made on behalf of the customer. Interest is paid at the same time as the deposit.

In addition, a certificate of deposit is a contract with a financial institution for the bank to provide access to your capital for a certain period of time.

Instead of sacrificing the liquidity of money, financial institutions often pay higher interest rates on their capital. Savers are free to choose the term of the certificate of deposit (often from one month to five years).

4. Notes Receivable

In the accounting world, a note receivable is a formal written statement of the amount a customer owes. As long as collection is expected within one year, accounts receivable are included in the current assets group which are recognized in the balance sheet of financial statements.

Notes receivable can also be used to pay off customer receivables. Notes receivable are also called accounts receivable. Guaranteed statements have several other advantages over reports recorded as receivable.

By signing the note, the debtor acknowledges the debt and agrees to make payments according to the written terms. Therefore, the memo has very strong lawsuits.

A note receivable is a written promise to pay a certain amount of money upon request or at a time specified therein. This letter can be paid to the customer, the company or the guarantor himself.

This letter is signed by the person or legal entity that has signed the contract. The person entitled to receive these notes is called the payee or payee, and the person making the promise is called the glitcher.

The date of payment of this bill is known as the due date. The maturity date calculation for the period from the issue date to the maturity date of the short-term bonds can later be expressed in daily or monthly terms.

5. Mutual funds

Mutual funds are an alternative form of investment for people who like investing, especially small investments and investors who don’t have much time and expertise to calculate their investment risks.

Mutual funds are designed as a way to raise money from people who have the capital, the desire to invest but little time and knowledge.

In addition, mutual funds are also expected to increase the role of local investors who invest in the Indonesian capital market.

In general, mutual funds are defined as a medium used to raise capital from the investment community and then invest in securities portfolios by investment managers.

There are three things related to this definition, namely first, the existence of funds from the investment community. Second, the fund is invested in a securities portfolio, and third, the fund is managed by an investment manager.

Thus, the funds in a mutual fund are investors’ mutual funds, while the investment manager is the party entrusted with managing the fund.

6. Securities

Securities are assets and financial instruments that are easily converted into cash and therefore highly liquid. Marketable securities are liquid because their maturities are usually one year or less, and the speed of transaction has minimal effect on price.

These securities are often used as a means of payment in modern business transactions, especially among entrepreneurs. Many businessmen use this title as a means of payment for business transactions because it is considered more convenient, safer and also has its own credibility.

In addition to being able to facilitate various transactional activities, securities are also useful as legal documents because these letters are instructions to the sender of the letter, who is considered a party capable of exercising or exercising and waiving certain rights.

7. Acceptance of Bankers

A banker’s acceptance is a form of payment guaranteed by a bank appraiser and not by an individual account holder. Because banks guarantee payments, short-term banking issues are considered fairly close to cash.

Banker acceptances are often used to facilitate transactions with little risk for both parties. Banker acceptances are short-term financial instruments representing future payments promised by the bank with terms of 30 to 180 days.

The bank’s approval process is similar to that of a short-term loan and includes various credit checks and guarantees. After the bank receives the bank acceptance, the obligation to immediately transfer from the issuer of the bank acceptance to the bank.

Issuer accepts bank deposits for future payments with banks. Banks charge a small fee and issue term drafts on deposits, which represent future payments guaranteed by the bank.

After being received from the bank, the obligation passes from the issuer receiving the bank to the person in charge of the bank. Thus, a bank’s acceptance credit rating is generally the same as the credit rating of a bank that promises payment.

Because bank acceptances are short-term instruments, the process for applying for a bond guarantee is similar to that of a short-term loan. Current liabilities are defined as obligations that will mature within the next 12 months or within the current financial year.

The bank will assess the creditworthiness of the borrower using internally established criteria to ensure that the borrower has sufficient funds to cover deposits for future payments.

Depending on the size of the receiving bank, the borrower may or may not need to apply for collateral. The bank charges the borrower a fraction of the amount.

8. Bank Current Accounts

Giro is a type of savings issued by a bank and can be used by its customers. The term giro savings customer has a special symbol called giran. Giran can withdraw the money using a check issued by the bank. This is clearly very different from ordinary savings that can be disbursed through an ATM.

9. Short Term Government Bonds

Bonds are tradable medium and long term bonds. Bonds with the promise of the issuer of securities to pay interest (coupon) in the form of interest (coupon) for a certain period of time and to repay the principal at the end of the specified period, obligations to the buyer.

Bonds are one of the fixed income investments that aim to provide a relatively stable level of increase in investment value with a relatively stable risk compared to stocks.

Meanwhile, Government Bonds, namely bonds in the form of state securities issued by the government of the Republic of Indonesia. The government issued fixed coupon bonds (FR-Fixed Rate series), variable coupon bonds (VR-Variable Rate series) and Sharia principle bonds/State Sukuk.

Short term Government Bonds are provided by the government to finance government projects. It is issued in the national currency of the country. Investors are concerned about political risk, interest rate risk and inflation when investing in government bonds.

10. Petty cash receipts

Petty cash receipts are records of cash payments used to make small transactions. And the petty cash receipt is forwarded to the person in charge of office expenses.

Objectives of Accounting for Cash Equivalents

To meet the reporting needs of users to measure earnings power, accountants report large amounts of investment income separately from operating income.

To help users assess solvency, balance sheets present cash equivalents. This amount can be compared to bonds that require short-term settlement.

For this purpose, PSAK also calls for disclosure of restrictions on the availability of liquidity, the purpose for which it is applied, or the duration of investments.

A cash balance can also help measure the earning potential of any surplus available for investment, allowing the business to grow or take advantage of other opportunities that arise.

Functions of Cash Equivalents for Business

Companies hold their capital as cash equivalents for several reasons.

First, cash equivalents are part of a company’s net working capital (current assets minus current liabilities), which is used to purchase inventories, cover operating expenses, and perform other purchasing operations.

Cash equivalents can also serve as an emergency fund for businesses or investors. Again, instead of letting the value of silver fall due to bank account inflation, an investor can earn a little extra income.

Finally, a company may intentionally hold a higher cash equivalent balance if it is needed to finance an acquisition. Instead of locking capital into long-term or volatile investments, companies may deliberately choose to sit on a pile of cash equivalents if they need to raise cash quickly.

Advantages and Disadvantages of Cash Equivalents

There are certain strategic circumstances in which a company or investor must hold cash equivalents. However, the benefits of cash equivalents also come with some limitations.

Cash Equivalent Profits

Cash equivalents are often a more efficient use of capital than holding cash entirely. Cash equivalents usually earn more interest than cash, although cash equivalents usually do not sacrifice much of the functionality or accessibility of cash.

Cash equivalents are presented as current assets in the balance sheet. As a result, these assets remain highly liquid when short-term returns are expected.

Unlike other types of financial instruments or investments, which have no definite or very long term of holding, cash equivalents are not intended to be held for a long period of time.

Finally, many cash equivalents have a fixed interest rate. For example, a certificate of deposit locks investors into a fixed interest rate for a certain period of time, resulting in a steady income.

During this period, the investor is guaranteed this interest rate (without taking into account fees or penalties for early violations). This level of security may be desired by some investors.

Lack of Cash Equivalents

Although cash equivalents typically generate a higher return or appreciation than cash, they still have a much lower earning potential than other investments.

In general, an investor should strive to obtain cash equivalents. However, capital is more likely to grow and create business value if it is invested in businesses or invested in riskier products that offer higher returns.

Conclusion

Cash equivalent assets are short-term business assets that can easily be converted into cash in a predictable amount. Cash equivalent assets are listed on the balance sheet on the first line because these are the company’s most liquid assets.

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Author: Ziaggi Fadhil Zahran