The cash account is one of the accounts most often encountered when preparing financial reports, because every transaction will definitely involve the use of cash, whether in metal, paper or other forms. In the financial sector, this term has several meanings. In this article, we will discuss in full the meaning of cash accounts obtained from several literatures. 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 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 value, the higher the liquidity characteristics.
Meanwhile, based on general understanding, cash can be considered as a place to store money or to pay and receive money. You can 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. Cash accounts are a form of accounting that is based on recording 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.
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Understanding Cash Accounts
A cash account is an account that contains details of money coming in and money going out. This is recorded with the aim of showing the remaining cash that must exist or the cash account. Another definition of a cash account is an account used to record various activities in the form of changes in nominal currency due to receipts and expenditures. Accounts involving cash and the like are classified as cash accounts, such as demand deposits, checks, etc., which can be used according to the function of money. Although term deposits are not included in the cash account, they are also very beneficial for business.
Understanding Cash According to Experts
The definition of cash in accounting is company assets in the form of cash, starting from banknotes, metals, money orders, checks, etc. which are held by the company or stored in the 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 having to face the risk of significant changes in value.
Apart from that, IAI also states that cash consists of cash on hand balances, checking accounts or cash equivalents. In 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 several explanations regarding the definition of cash according to experts:
1. Thomas Sumarsan
According to Thomas Sumarsan, the definition of cash is a current asset that is very 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 measurement in the field of accounting.
3. Rudianto
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 money and savings stored in the bank. Where the money can be withdrawn directly at any time without reducing the value of the savings.
5. Dwi Martani
According to Dwi Martani, cash is the most liquid financial asset and can be used every day for company continuity activities and also to fulfill company obligations.
Types of Cash Accounts
There are several types of cash accounts in bookkeeping. Depending on its 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. Apart from that, 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 certain checking accounts. This account is called an operating account and is used to handle business activities such as paying bills and depositing income.
2. Payroll Checking Account
As the name suggests, this payroll account is used to make payroll. There are many medium to large companies that have special checking accounts to pay employee salaries.
3. Merchant Account
If a business allows its customers to pay with a credit card or debit card, then it probably has a merchant account. This account is only used for financial traffic from trading activities.
4. Petty Cash Account
This account is also called an imprest account because it always has the same balance. Most companies have a cash box to be used to pay small expenses every day. The money in the petty cash is used.
5. Sweep Account
This account is a way for companies to get investment income automatically. Every day, any extra money in the company’s operational account is collected and also transferred to the investment account.
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Types of Cash
Cash in the company can be divided into several synchronous parts based on its use. 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 prepared by a company to pay various kinds of expenses that are relatively small in value and economical. In other words, petty cash or petty cash is money prepared by a company to pay various company expenses which are small in amount and not economical if paid by check.
2. Cash in Bank
Cash in the bank is company money that is in a bank account. Generally, this cash is used for relatively large expenditures and it is not possible to provide it in the form of cash in transactions because the amount is large and is vulnerable from a security perspective. Usually this type of cash is related to a bank statement for the company.
3. Cash Reporting
Even though cash reporting can be done directly, there are problems with reporting. Issues related to cash reporting are divided into 3 parts, including:
a. Cash Equivalents
Cash equivalent or what is usually called cash equivalent is 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 debt securities and treasury bills.
b. Restricted Cash
Restricted cash or what is usually called limited cash is cash that is deliberately set aside for future obligations, the amount of which is 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 environmental damage worth 15 million rupiah for the next five years. Based on these conditions, the company will set aside 15 million rupiah into a 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, the Maju Jaya Company issued a check worth 120 million rupiah, even though the balance in their account at the bank was only worth 100 million rupiah. So the existing 20 million goes into short-term debt.
Cash Account Criteria
Because it can have an impact on accounting, this cash account is considered special bookkeeping. The cash account is usually useful as a ledger and also the main entry book in accounting. There are two cash account criteria, including:
a. Available: there must be cash available in it to then be used for the company’s daily expenses.
b. Free: if accepted as a means of payment generally according to its nominal value, then each item will be classified as cash.
Cash Example
The following are several 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 which is valid for 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 long distances.
c. Postal money order: The meaning of a postal money order 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 that is stored in the bank and can be withdrawn at any time, can be categorized as cash and cash equivalents.
f. Cashier’s Check: This is a check made and signed by a bank which can be drawn by that bank to make payments to other parties.
Example of Cash Use
As previously discussed, this term is also used in bookkeeping. Small companies usually use cash accounting because it is relatively easier and more basic. Cash accounting provides a clearer picture of how much money a company actually 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, a B2B transaction occurs between company A and company B. Company A receives Rp. 25 million from the sale of 5 computers to company B on February 15. The transaction was recorded as occurring on February 15 even though the order was made on January 20. When does the order occur does it matter? Because company B didn’t pay until February 15, when the computers were actually delivered.
On the other hand, company A continues to document transactions worth Rp. 25 million on January 20 under accrual accounting, even though no money was actually paid on that day. With this accounting, companies report expenses when paying them.
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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. The following is a complete explanation.
1. Beginner Friendly
You no longer need to be an accounting expert to be able to start bookkeeping with this cash account. Where you only need to record transactions when you pay a fee and get paid for a service or sale. Plus, you won’t have as many accounts to keep track of and you won’t need to understand the double-entry bookkeeping system.
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 and receivables into the equation.
3. Regarding Liquidity
Because it can only be used to record cash transactions, potential investors who want to invest in this business do not need to go through any liquidity ratios. Potential investors can look at the accounting system, see inflows and outflows, and find out for themselves the net cash flow of the business/
This is an explanation of the meaning of cash accounts, their types and benefits for business. For Mudalovers who want to know more deeply about economics and other accounting sciences, you can read related article by visiting mudabicara.com. To support Mudalovers in broadening their knowledge.