The cash account is one of the most frequently encountered accounts when compiling financial statements, because every transaction will definitely involve the use of cash, be it in metal, paper, or other forms. In the field of finance, this one term has several meanings. In this article, we will discuss in full the meaning of cash accounts obtained from several literatures. The discussion of cash accounts often involves other terms, namely accounting, bookkeeping, and cash itself.
You may already be familiar with cash in business. The definition of cash or cash in accounting is cash paid directly without debt. However, cash itself has a broader meaning. This is one of the most liquid asset classes, where the higher the nominal, the higher the liquidity.
While based on the general understanding, cash can be considered as a place to save money or to pay and receive money. You could say that cash is cash that is used to exchange debts, goods, or services. But when it comes to accounting, it means something completely different. A cash account is a form of accounting that is based on recording the actual transactions that occur.
So, in this article, the discussion will focus more on understanding cash accounts in accounting. Not only that, we will also discuss the types, examples, and benefits for businesses that use them.
Definition of Cash Account
A cash account is an account that contains details of incoming and outgoing money. These are recorded for the purpose of showing the remaining cash that must exist or a cash account. Another understanding of a cash account is an account that is used to record various activities in the form of changes in nominal currency due to receipts and expenditures. Accounts involving cash and the like that are classified as cash accounts, such as demand deposits, checks, and so on, which can be used according to the function of money. Although time deposits are not included in the cash account, they are also very beneficial for business.
Definition of Cash According to Experts
The definition of cash in accounting is company assets in the form of cash, ranging from banknotes, coins, money orders, checks, and so on that are held by the company or kept in a bank and can be used for general company activities. According to the Indonesian Institute of Accountants or IAI, cash is an investment that can be liquid, has a short term and can be quickly turned into cash in a certain amount without the need to face the risk of significant changes in value.
In addition, IAI also states that cash consists of cash on hand balances, checking accounts or cash equivalents. On the balance sheet, cash will appear as the first item at the top because it is the most liquid asset in the company. Companies often include cash equivalents in this category, namely money market mutual funds and other short-term investments that are easy to convert into cash.
To make it easier to understand the meaning of cash itself, here are some explanations regarding the definition of cash according to experts:
1. Thomas Sumarsan
According to Thomas Sumarsan, cash is a current asset that is highly liquid and can be used directly for the continuity of business activities in the company.
2. Zaki Baridwan
Zaki has the opinion that cash is a medium of exchange and can be used in the form of measurements in the field of accounting.
According to Rudianto, cash is a company’s means of payment or exchange and can be used directly for company transaction activities when needed by the company.
4. Theodorus M. Tuanakotta, AK
According to this accounting expert, cash is all the money and deposits kept in the bank. Where the money can be disbursed directly at any time without reducing the value of the deposit.
5. Dwi Martani
The definition of cash according to Dwi Martani is as a financial asset that is the most liquid and can be used every day for the company’s sustainability activities and also to fulfill the company’s obligations.
Types of Cash Accounts
There are several types of cash accounts in the books. Depending on the size, a business can manage revenue and bill payments in one or more types of accounts. For example, a retail business may have separate operating accounts and merchant accounts, for example as a credit card transaction storage account.
Other large companies may also have separate operating and payroll accounts. In addition, they also have a cash account to earn interest income. With these various possibilities, there are several types of cash accounts that you need to know, including:
1. Operational Current Account
A business will generally allocate a certain checking account. Where this account is called an operating account and is used to handle business activities such as paying bills and depositing income.
2. Payroll Current Account
As the name implies, this payroll account is used to make payroll. There are lots of medium to high-end companies that have special checking accounts to pay their employees’ salaries.
3. Merchant Account
If a business allows its customers to pay by credit card or debit card, it probably has a merchant account. The account is only used for financial traffic from trading activities.
4. Petty Cash Account
This one account is also called an imprest account because it always has the same balance. Most companies have a cash box to use to pay for small daily expenses. The money in the petty cash is what is used.
5. Sweep Accounts
This one account is a way for companies to get investment income automatically. Every day, any extra money that is in the company’s operating account is collected and also transferred to the investment account.
Types of Cash
Cash in the company can be divided into several synchronous parts based on their designation. The following are several types of cash accounts in the company, including:
1. Petty Cash or Petty Cash
Petty cash is a cash account in the form of cash that is prepared by the company to pay various kinds of expenses which are relatively small and economical in value. In other words, petty cash or petty cash is money prepared by the company to pay for various company expenses which are small and uneconomical when paid by check.
2. Cash in the Bank
Cash in the bank is the company’s money in a bank account. Generally, this type of cash is used for relatively large expenditures and it is impossible to give cash in transactions because the amounts are large and vulnerable from a security point of view. Usually this type of cash is related to checking accounts from banks for companies.
3. Cash Reporting
Even though cash reporting can be done immediately, there are problems in reporting. Issues related to cash reporting are divided into 3 parts, including:
a. Cash Equivalents
Cash equivalents or commonly referred to as cash equivalents are a group of company assets that have a maturity of less than three months. This will be very useful when used in difficult or unstable economic conditions. Examples of cash equivalents are government bonds and treasury bills.
b. Restricted Cash
Restricted cash or commonly referred to as limited cash is cash that is deliberately set aside for future obligations which are quite significant. The following is an overview of restricted cash to make it easier for you to understand:
The company has an obligation to pay for environmental damage worth 15 million rupiah for the next five years. Based on these conditions, the company will set aside 15 million rupiah to the restricted cash account.
c. Bank Overdrafts
Bank overdrafts are when a company issues a check whose value is greater than the balance in the bank. For example, regarding bank overdrafts, Maju Jaya Company issued a check for 120 million rupiah, even though the balance in their account at the bank was only 100 million rupiah. So the existing 20 million went into short-term debt.
Cash Account Criteria
Because it can have an impact on accounting, this cash account is assessed as a special bookkeeping. The cash account is usually used as a general ledger and also as a main entry book in accounting. There are two criteria for a cash account, including:
a. Available: there must be cash available in it to be used as the company’s daily expenses.
b. Free: if accepted as a means of payment in general according to its nominal value, then each item will be classified as cash.
The following are some examples of cash that need to be understood, including:
a. Cash: This is money that you can use in the form of paper or metal that applies to payments.
b. Travelers Check: This is a check issued by a commercial bank, which can be used to serve customers who want to travel or travel for a certain time over a long distance.
c. Wesel Pos: The meaning of money order itself is a document that can be used as cash when you suddenly want to use it.
d. Check: This is a document that can be accepted as payment from another party.
e. Company Money: Money kept in a bank and can be withdrawn at any time, can be categorized as cash and cash equivalents.
f. Cashier’s Check: This is a check drawn up and signed by a bank which can be drawn by that bank to make payments to other parties.
Examples of Use of Cash
As previously discussed, this term is also used in bookkeeping. Small companies usually use cash accounting because it is relatively easy and also basic. Cash accounting provides a clearer picture of how much money a company really has. However, the downside is that when payments are registered in cash, the cash has a delayed impact on the account. Therefore, it is often less precise for the near future than other types of accounting. The following is an example of its use.
For example, B2B transactions occur between company A and company B. Company A gets Rp. 25 million from the sale of 5 computers to company B on February 15th. The transaction is recorded as occurring on 15 February even though the order was placed on 20 January. When does the order occur doesn’t matter? Because company B doesn’t pay for it until February 15th, when the computers actually ship.
On the other hand, company A continues to document transactions worth Rp. The 25 million was on January 20 under accrual accounting, even though no money was actually paid that day. With this accounting, companies report expenses when they pay them.
Benefits of Cash Accounts in Business
Despite its weaknesses, cash accounting has several important functions in a business. This type of accounting is quite useful, especially for small companies. Here is a full explanation.
1. Friendly For Beginners
You no longer need to be an accounting expert to start bookkeeping with this cash account. Where you only need to record transactions when you pay a fee and are paid for a service or sale. Plus, you won’t have multiple accounts to keep track of and you won’t have to understand double-entry bookkeeping.
2. Cash Flow Tracking
Another benefit of using a cash account is that it can provide a clear picture of how much cash you have for later use. This is very useful for small businesses and beginners, because they can manage expenses more easily. What you have in your cash account is what you have to spend at any given point in time. Vice versa, with accrual accounting, you only need to factor future payments as well as receivables into the equation.
3. Regarding Liquidity
Because it can only be used to record cash transactions, potential investors who wish to invest in this business do not need to go through any liquidity ratios. Potential investors can look at the accounting system, see incoming and outgoing flows, and find out for themselves the net cash flow of the business/
This is an explanation of the meaning of a cash account, its types, and its benefits for business. For Sinaumed’s who want to know more deeply about economics and other accounting, they can read related books by visiting sinaumedia.com. To support Sinaumed’s in adding insight, sinaumedia always provides quality and original books so that Sinaumed’s has #MoreWithReading information.