Hello Mudalovers. This time we will discuss one of the terms related to finance, namely cash accounts. Maybe only a few people know the meaning of a cash account, even though we may have used it.
In finance, this term has several definitions. The following is a brief explanation obtained from several literatures. Discussion of cash accounts often also involves other terms, namely cash, accounting and bookkeeping
You are probably familiar with cash in business. The definition of cash or cash in accounting is cash that is paid directly without debt. However, cash has a broader meaning in the basics of accounting or otherwise. It is one of the most liquid asset classes. The higher the nominal value, the higher the liquidity characteristics
In a general sense, cash can be considered as a place to store money or to pay and receive money. You can say that it is cash used to exchange goods, debts or services
But talking about accounting, the meaning is completely different. Cash accounts are a form of accounting that is based on recording actual transactions that occur
In this article, the discussion will focus on understanding it in accounting. Apart from that, the types will also be explained, examples of how to register and the benefits for existing businesses
Understanding Cash Accounts
A cash account is an account that contains details about incoming and outgoing money. This is recorded to show the remaining amount of cash that must be on hand (cash account). Another definition of a cash account is an account used to record activities in the form of changes in nominal currency due to receipts and expenditures
Accounts involving money or cash and the like which are classified as cash accounts, such as demand deposits, checks, etc., can be used according to the function of money even though time deposits are not included in cash accounts, they are very useful for business
Cash Account Criteria
Because it can have an impact on accounting, cash accounts are considered special bookkeeping. The cash account as usual functions as a ledger and main entry book in accounting
There are two cash account criteria, namely:
- Available: there must be cash available to be used for the company’s daily expenses
- Free: if accepted as a means of payment in general according to its nominal value, then each item is classified as cash
Cash and cash equivalents
Cash is a readily available and free means of payment used to finance general business activities. A loan means that the business must provide sufficient cash to cover unexpected business expenses.
Free means that the business is free to use cash for expenses incurred by the business. Cash is also the most liquid asset. The liquidity of a company is important information for readers (users) of financial reports to make economic decisions.
According to the Accounting Standards Report (2013), cash includes cash balances and checking accounts. Cash equivalents are highly liquid short-term investments that can be quickly converted into a specified amount of cash without the risk of significant changes in value.
According to Sugiri and Sumiyana (2005), creditors are very interested in information about the company’s ability to pay off its short-term obligations. With this and other relevant information, lenders can decide whether to grant or deny a credit application
Investors also pay attention to liquidity information when deciding to maintain their investment, add to or even withdraw from a business
Types of Cash Accounts
According to Rizal Effendi (2013), the definition of cash is anything (whether in the form of money or not) that can be used as a means of payment or a means of paying off obligations.
Cash in the company can be divided into several parts according to its allocation. Cash in a company can be divided into several parts according to its allocation. The several types of cash in the company are as follows;
1. Petty Cash (Petty Cash)
Petty Cash is cash in the form of cash prepared by the company to pay various expenses whose value is relatively small and not economical if the payment is by check.
When recording mini cash flows, companies generally use 2 recording methods, namely the permanent fund system method and the variable fund system method
This type of cash is reserved for expenses such as the company’s daily operations
Examples of uses for petty cash include travel costs, minimum expenses and meals, transportation, internet costs, entertainment, and office supplies such as stationery. There are several ways to record petty cash, namely:
- Imprest method (fixed fund method), the amount is fixed every time it is filled in or the small amount of cash returned will be the same as the nominal amount issued
- Fluctuation Method, the amount changes along with expenditures and additions to petty cash
The purpose of establishing petty cash is:
- To avoid using uneconomical and unrealistic payment methods, petty cash must be used to make it more practical for the company’s development
- Various activities related to operations were accelerated and sudden
- If payment by check is not available, please provide assistance in person
- Help employees to provide the best quality service to customers
- Pay low prices
2. Cash In Bank (Cash at Bank)
Cash in the Bank is money that a company keeps in a private bank account which is relatively large in amount and requires better security. In this case, cash at the bank always includes the bank’s company checking account
Examples of expenses required to use large amounts of cash, such as asset purchases, lease payments, debt payments, and other expenses. The objectives of forming large cash are as follows:
- For large amounts of direct or indirect payments, checks can be used
- If the costs are relatively large, it will make the company’s business activities faster
- Avoid unrealistic payment processes
- As a means of payment of large amounts of money
3. Cash Equivalents
Cash equivalents are referred to as cash equivalents, referring to company assets held for less than 3 months. These cash equivalents will be useful in unstable monetary economic conditions, examples of cash equivalents are SUN or government securities and state debt securities.
4. Restricted Cash
Restricted Cash or cash that is restricted in use is cash that is deliberately set aside for significant future obligations
5. Bank Overdrafts
Bank overdrafts are companies that issue checks with a value greater than the bank balance
Read Also : What is a Real Account? Definition, Types and Examples, and Differences!
Difference between Petty Cash Account and Large Cash Account
The cash account is undoubtedly the account that you will encounter most often when preparing financial statements, because every transaction will definitely involve the use of cash, paper, metal or other forms, but you can find out that the cash account itself is divided into two categories
Cash accounts are divided into two types, petty cash and compound cash. It could be that an idea that is new to you raises various questions in your brain, such as what is the difference between these two ideas? How for example?
Fortunately, by visiting Mudalovers you will get the answer because in the following review we will discuss the differences between petty cash accounts and large cash accounts along with examples.
Petty cash
Petty cash or petty cash is a type of cash or funds prepared for current expenses or business operating activities in relatively small nominal amounts.
Examples of expenses that use petty cash, such as:
- Transportation costs
- Travel expense
- Food and drink costs
- Purchase of ATK or office supplies
- Entertainment costs
- Internet costs
The formation of petty cash has several objectives, including:
- Accelerate sudden business operational activities.
- Petty cash can be used to avoid payment methods that are considered uneconomical and impractical for company development.
- Assist staff and employees in providing maximum quality service to customers.
- Can be used as bailout funds or direct funds if payment cannot be made by check.
- Paying expenses that require little outlay.
Big Cash
Large cash or cash in bank is a type of cash or funds prepared for occasional expenses or activities that require a higher nominal amount.
Examples of expenses that use large cash:
- Venue rental costs
- Asset purchases
- Acquisition
- Debt payments
- And other costs require an amount above IDR 1,000,000.
The goal of building substantial cash flow is as follows:
Accelerating business operations requires relatively greater costs. Large amounts of cash are used to avoid payment methods that are considered uneconomical and impractical for business.
Can be used as direct or indirect funds for large payments and can use checks. Pay expenses with a higher nominal amount.
Cash Receipt System
The cash receipts accounting system is a record made to carry out activities to collect funds from cash sales or receivables that are ready and free to use for general company activities.
The cash receipts accounting system is a process where cash flows that occur in a company run continuously throughout the life cycle of the company involved. Cash flow includes cash inflow and cash outflow.
Based on this understanding, it can be concluded that the cash receipts accounting system is a unit that collects, records transactions, and can assist leaders in processing company receipts. The forms of cash payments from customers are:
- Cash,
- Check
- Tour
- Transfer via bank,
- Bank Money Orders
The way cash is received is that customers pay their own fees for approved transactions, creditor charges, and reimbursements for accounts payable. The cash receipts accounting system consists of two main systems, namely:
1. Cash Sales Cash Receipt System
According to Mulyadi (2008), the largest source of cash income for trading companies comes from cash sales transactions. Based on a good internal control system, a cash sales cash receipt system requires:
- Cash receipts in cash must be deposited immediately in full and internally checked by a party other than the cashier
- Cash receipts from cash sales are generated through credit card transactions, which involve the credit card issuing bank recording the cash receipts
2. Cash Receipt System for Receivables
Mulyadi (2008) explains that to guarantee the company’s cash receipts, a cash receipt system for receivables requires:
- The debtor pays by check or transfer via bank account (bilyet giro)
If a company only accepts cash in the form of checks in the company’s name, it guarantees that any cash received from the company will be credited to the company’s checking account. Bookkeeping also ensures the receipt of cash into the company’s bank checking account
- Any cash received in the form of a check from a debtor must be paid immediately and in full to the bank
Read Also : What is Amortization? Definition, How to Calculate, Benefits, and Case Examples
Cash Disbursement System
The withdrawal accounting system is a system for recording all cash withdrawal transactions, including a series of processes for receiving, storing, distributing, paying, depositing and disbursing funds in company operations. The cash payment system consists of two main systems:
- Cash Expenditure Report by Check, or Cash Expenditure Report by Check, usually for high denomination expenses
- Cash disbursement accounting system with cash through a petty cash fund system. This is a petty cash system used by businesses when there are small nominal payments. This system is implemented in two ways: floating balance system and counting system
Cash flow statement
Cash flow statement, also known as cash flow statement, is an important element that provides information about the financial position of a business for a certain period of time. A cash flow statement is a statement that details a company’s cash inflows (income) and outflows (expenses) during a certain period
What is usually described in a cash flow statement includes the amount of cash received, such as cash income by the owner and cash investments, and the amount of cash expended by the business, such as issuing costs, debt payments, and personal fishing.
The cash flow report is prepared after the financial report is prepared and is prepared based on the current period’s profit and loss report and previous period’s balance sheet data. Cash flow reports for both goods and services businesses have a classification that is divided into three types of activities, namely operations, investment and financing
- Operational Cash Flow (Operational Cash Flow)
Operating cash flow is cash flow related to business activities during a certain period. Operating activities affect the income statement, which is presented on an accrual basis. Meanwhile, the cash flow statement reflects the impact on cash. Usually the meaning of operating cash flow is collecting money from consumers or income from payment of receivables
- Investment Cash Flow (Investing Cash Flow)
Investment cash flows are cash inflows and outflows related to a company’s investment activities over a certain period of time. Investment activities add and subtract from the long-lived assets that a company uses to carry out its activities.
Some activities that include cash flow investment are buying and selling fixed assets, stock investment, and other forms of investment. For example, the purchase or sale of fixed assets such as land, buildings or equipment is an investment
- Financing Cash Flow ( Financing Cash Flow)
Financing cash flow is cash flow related to the company’s financing activities (capital reductions and capital additions) during a certain period. Financing activities include activities aimed at obtaining liquidity from investors and creditors necessary for operations and continuation of business activities.
Some examples of financing activities are bank loans, issuing bonds, issuing shares through an IPO, issuing new shares through preferential rights and others
Function and Purpose of the Cash Flow Statement
One of the primary functions and objectives of the cash flow report lies in the news presented regarding the expenditure and receipt of cash in a period. From this news companies can create financial tactics, for example assessing a company’s hygienic assets, a company’s financial structure (liquidity & solvency) and adjusting cash flows using changing circumstances and opportunities.
A company that has high net profits may not necessarily claim that the company can pay employee fees and buy equipment. The company can pay employee fees and buy company equipment, which is why a cash flow report is needed. Specifically, the cash flow statement aims to:
- Estimating cash flows in the future period from the current period’s cash flow financial statements,
- Determining the company’s ability or inability to pay company obligations,
- The basis for making decisions to improve company performance
- Report on the interaction of hygiene profits on changes in company cash
Benefits of Cash Flow Statements
Of course, financial reports, especially cash flow reports, provide benefits not only for the company but also for many parties, for example investors, creditors, company managers and other parties. Not only goods companies, service companies can also enjoy the benefits of cash flow reports. The following are the benefits based on the cash flow report:
- View your financial position easily,
- Increase company cash in the future,
- Assessing the company’s ability to fulfill its obligations,
- Looking at company financing & investment,
- Differentiate net profit using hygienic cash flow
Read Also : What Are Cash Equivalent Assets? Definition, Types, Objectives and Functions in the Business World
Conclusion
From the explanation above, we can conclude that a cash account is an account that business people must have for easy recording of income and expenditure of funds. Cash is divided into several categories to work according to conditions that occur in the business
For example, using petty cash is most effective when a business needs to spend a small amount of money to make processes run more smoothly. Meanwhile, for needs such as buying property and paying rent, cash is best used to speed up the transaction process.