What is Cash?

In accounting, cash is recognized as the most liquid asset, serving as the basis for measuring other assets and enabling immediate transactions.

Classified as a current asset on the balance sheet, cash encompasses coins, currency, and available bank deposits. However, recent advancements in financial products and accounting standards have introduced more nuanced classifications, especially with the rise of digital assets and complex investment instruments.

➤ Items Considered as Cash

Beyond physical currency, various negotiable instruments are also viewed as cash equivalents, including:

Money orders: Prepaid instruments that guarantee payment.
Certified and cashier’s checks: Bank-backed payment methods considered as cash.
Personal checks and bank drafts: Commonly accepted as cash, though they require processing.

Savings accounts also fall under cash, despite banks’ legal right to demand notice before withdrawals. The infrequency of such requirements allows for their inclusion in cash classification accounting standards.

➤ Cash Equivalents in a Modern Context

Cash equivalents are short-term, highly liquid investments that are easily convertible to cash with minimal risk of value fluctuation. Common examples include:

Money market funds and certificates of deposit (CDs): Traditionally classified as cash equivalents, these instruments offer short-term interest while maintaining liquidity. However, if these funds have restrictions or penalties for early conversion, they may be classified as temporary investments rather than cash equivalents.

With the development of more diverse financial instruments, some exchange-traded funds (ETFs) specifically designed for high liquidity may qualify as cash equivalents under certain conditions. It’s crucial for companies to assess each instrument based on its liquidity and risk to determine its proper classification.

➤ Digital and Crypto Assets

Digital and crypto assets, such as Bitcoin or Ethereum, have gained traction but are generally not classified as cash or cash equivalents under current accounting standards. Instead, they are often categorized as intangible assets or financial assets due to their volatility and limited convertibility to cash without market risk. This distinction helps maintain clarity in financial reporting, even as digital transactions increase.

➤ Items with Classification Challenges

Certain items pose classification challenges due to their nature or usage:

Postdated checks and I.O.U.s: These are treated as receivables, not cash, since they represent promises to pay in the future.
Travel advances: Considered receivables if deducted from employee salaries or later collected; otherwise, they may be classified as prepaid expenses.
Postage stamps: Generally categorized as part of office supplies inventory or as a prepaid expense due to their operational purpose rather than as cash.

➤ Petty Cash and Change Funds in the Digital Age

Traditionally, companies maintained petty cash and change funds for minor, on-hand expenses. Although digital payment methods have reduced the need for physical cash reserves, petty cash is still included in current assets when used for operational purposes. Many companies now utilize prepaid or company debit cards to manage small expenses, though these are accounted for similarly to cash in practice.

➤ Summary

In today’s accounting landscape, cash includes a range of instruments and assets that provide immediate liquidity. While traditional cash items remain largely the same, the classification of cash equivalents requires careful assessment, especially with the rise of digital assets and new investment products. Staying updated with evolving standards from entities like the Financial Accounting Standards Board (FASB) or International Accounting Standards Board (IASB) is essential for accurate financial reporting, ensuring that assets are correctly classified and liquidity is effectively managed.