Cash equivalents are assets owned by business people. These are short-term investment assets that can be converted into cash in a relatively short time.
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. It can be converted to rupiah for a certain amount.
Cash equivalent assets are all types of money, both banknotes and coins. And applied at home and abroad. And every correspondence is 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 another entity).
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 allows investors to 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 considering its ability to generate cash and cash equivalents because it reflects how the company will be able to pay its bills in the short term.
You can also determine whether there are companies with large amounts of cash and cash equivalents that are prime targets for large companies planning to acquire small businesses.
When presented in financial statements, investments in this type of account are often equated with cash. Therefore, cash equivalents include investment vehicles that are similar to a company’s entire cash balance.
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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 currencies. 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 United States dollar rises.
Apart from that, the exchange rate is also influenced by the country’s inflation rate. Inflation is lower in more prosperous countries. This right stems from the economic and political situation of the country. The political and economic situation of a country also influences exchange rates. Government controls also contribute to exchange rate fluctuations in currencies.
2. Check
A check is a letter printed by a bank that customers 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 for customers or business people. You can also withdraw money at any time during bank opening hours.
Withdrawing money using a check is not as easy as it sounds. There are several conditions for using a check. This means that the check name must be unique. The name of the prospective buyer and the location of the transaction must include the date the check was disbursed. Checks are valid for six months from the date the check is submitted. There are various types of checks, namely, blank checks, bearer checks, checks made in the name of another person, 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 subject to sanctions by the bank.
There are many types of deposits, such as time deposits, certificates of deposit and on call deposits. Term deposits are savings that have a choice of certain time periods, such as 3 months 6 months 1 year to 2 years. Meanwhile, deposit certificates do not have the name of a person or institution.
Because this certificate can be transferred later. You can also sell to other parties. And interest on these savings is given every month or at maturity. On call deposits are savings accounts 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.
Additionally, 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 cash liquidity, 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 world of accounting, a note receivable is a formal written statement of the amount owed by a consumer. As long as collection is expected within one year, receivables are included in the current assets group which are recognized on the balance sheet of the financial statements.
Notes receivable can also be used to pay off customer receivables. Notes receivable are also called receivables. Guaranteed statements have several other advantages over statements recorded in the form of accounts receivable.
By signing a money order, the debtor acknowledges the debt and agrees to make payments according to the written terms. Therefore, the memo has very strong legal claims.
A note receivable is a written promise to pay a certain amount of money on demand or at the 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 who has signed the contract. The person who is entitled to receive these notes is called the payee or payee, and the person who makes the promise is called the slipper of the tongue.
The bill payment date is called the due date. The calculation of the maturity date for the period from the issuance date to the maturity date of the short-term bond 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 do not have much time and expertise to calculate their investment risks.
Mutual funds were designed as a way to raise money from people who have capital, a desire to invest but little time and knowledge.
Apart from that, 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 vehicle used to collect capital from the investment community and then invested in a portfolio of securities by an investment manager.
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 mutual funds are investors’ mutual funds, while the investment manager is the party trusted to manage these funds.
6. Securities
Securities are assets and financial instruments that are easily converted into cash and are therefore highly liquid. Marketable securities are liquid because their maturity is usually one year or less, and the speed of transactions has minimal influence on price.
These securities are often used as a means of payment in modern business transactions, especially among entrepreneurs. Many entrepreneurs use this title as a means of payment for business transactions because it is considered more convenient, safer and also has its own credibility.
Apart from being able to facilitate various transactional activities, securities are also useful as legal documents because this letter is an indication to the sender of the letter, who is considered a party who is capable of exercising or exercising and releasing certain rights.
7. Banker Acceptance
Banker’s acceptance is a form of payment guaranteed by the bank’s appraiser and not by the individual account holder. Since the bank guarantees payment, short-term banking issues are considered quite close to cash.
Banker acceptances are often used to facilitate transactions with little risk for both parties. Banker’s acceptances are short-term financial instruments that represent future payments promised by the bank with a term of 30 to 180 days.
The bank approval process is similar to a short-term loan and includes various credit checks and guarantees. After the bank receives the bank acceptance, the obligation immediately moves from the issuer of the bank acceptance to the bank.
The publisher receives a bank deposit for future payments with the bank. Banks charge a small fee and issue term drafts on deposits, which represent future payments guaranteed by the bank.
Once received from the bank, the obligation shifts from the issuing bank receiving bank to the person in charge of the bank. Thus, the bank’s acceptance credit rating is generally the same as the credit rating of the bank promising payment.
Since bank acceptances are short-term instruments, the process for applying for bond collateral is similar to a short-term loan. Current liabilities are defined as liabilities that will mature within the next 12 months or within the current financial year.
The bank will assess the borrower’s creditworthiness using internally established criteria to ensure that the borrower has sufficient funds to cover savings 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 small portion of the amount.
8. Giro Bank
Current accounts are a type of savings issued by banks and can be used by their customers. The term giro savings customer has a special symbol called giran. Giran can withdraw his money using a check issued by the bank. This is clearly very different from ordinary savings which can be withdrawn via ATM.
9. Short Term Government Bonds
Bonds are medium and long term debt securities that can be traded. Bonds with a promise by 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, an obligation to the buyer.
Bonds are a type of fixed income investment that aims to provide a relatively stable rate of increase in investment value with relatively stable risk compared to shares.
Meanwhile, Government Bonds, namely bonds in the form of state securities issued by the government of the Republic of Indonesia. The government issues fixed coupon bonds (FR-Fixed Rate series), variable coupon bonds (VR-Variable Rate series) and Sharia principle bonds/Government 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 worry about political risk, interest rate risk and inflation when investing in government bonds.
10. Petty Cash Bill
A petty cash receipt is a cash payment note used to carry out small transactions. And the petty cash receipt is passed on to the person responsible for office expenses.
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Purpose of Cash Equivalent Accounting
To meet users’ reporting needs to measure earnings power, accountants report a large amount of investment income separately from operating income.
To help users assess solvency, the balance sheet presents cash equivalents. This amount can be compared to bonds that require short-term settlement.
To this end, PSAK also calls for disclosure of limitations on the availability of liquidity, the purpose for which they are implemented, or the duration of the investment.
Cash balances can also help measure the earning potential of the surplus available for investment, allowing the business to grow or take advantage of other opportunities as they arise.
Cash Equivalent Function 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 inventory, cover operating costs, and perform other purchasing operations.
Cash equivalents can also serve as emergency funds 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 have a higher cash equivalent balance if necessary 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.
Cash Equivalent Gains and Losses
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 all cash. Cash equivalents typically earn more interest than cash, although cash equivalents typically do not sacrifice much of the functionality or accessibility of cash.
Cash equivalents are presented as current assets on 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 that do not have a fixed or very long holding period, 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 an investor into a fixed interest rate for a specified period of time, generating a fixed income.
During this period, investors are guaranteed this interest rate (without taking into account fees or penalties for initial violations). This level of security may be desired by some investors.
Shortage of Cash Equivalents
Although cash equivalents typically generate higher returns 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 the business or invested in riskier products that offer higher returns.
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Conclusion
Cash equivalent assets are short-term business assets that can be easily converted into predictable amounts of cash. Cash equivalent assets are recorded on the balance sheet on the first line because they are the company’s most liquid assets.
To make it easier for you to learn and understand cash equivalent assets, you can read articles at mudabicara.com which provides many articles on accounting.