The Accounting Guru, Cash and Cash Equivalents

Cash

From a layman's point of view, the term cash is interchangeable with the word money. On the other hand, in accounting and business in general, cash does not only pertain to money on hand but also to the other items that can be used as a medium of exchange.

Highly-liquid items such as checks (except stale and postdated ones), money orders, bank drafts, debit cards and demand and savings deposits also qualifies as cash items. (per accounting standards)

A practical way to determine whether to consider an item as cash is to ask a simple questions;

Would the bank accept the item for deposit or immediate encashment?

If the answer in the above question is yes then, it can be justified that the item best suits the cash account.

Cash Equivalents

Cash Equivalents are highly-liquid investments which are readily convertible into cash.

Cash Equivalents are mainly short-term investments that can be liquidated at any given time. It includes predetermined time deposits, treasury bills, marketable securities, debt securities, money market placements and other commercialized papers.

To be considered as cash equivalents items must meet the following requirements;

• It must be readily convertible to cash.
• It must be so near to their maturity dates that it presents insignificant risk of impairment and loss in fair market value.

Accounting standards imply that both the cash and cash equivalents accounts shall be recorded but most of the time, in financial statement presentations, these two items are combined into one line item known as; Cash and Cash Equivalents.