What it means
Cash is the asset every other account eventually turns into or comes from. Sales become receivables and receivables become cash; purchases become payables and payables are settled in cash; wages, tax, rent, loan repayments and dividends all leave through it.
The cash account is the ledger's record of those movements and of the balance they leave. Most businesses keep several.
A petty cash account for small physical payments; a main bank account for the operating current account; separate accounts for each additional bank account, currency account, deposit account and, often, each till or payment processor. In the financial statements they are aggregated as "cash and cash equivalents", with cash equivalents being short-term, highly liquid investments (deposits and money market funds maturing within about three months) that are as good as cash.
Bank overdrafts repayable on demand are, under IFRS, sometimes netted against cash where they form part of cash management; under US GAAP they are liabilities. The account is kept by double entry.
A customer's payment is a debit to cash and a credit to receivables. A supplier payment is a credit to cash and a debit to payables.
Bank charges are a credit to cash and a debit to an expense. In a well-run system most entries come automatically from a bank feed, with the accounting software matching each bank transaction to an invoice, bill or category, and the bookkeeper handling the exceptions.
The defining control is reconciliation. The cash account balance is compared with the bank statement balance and the differences are identified: cheques written but not yet cleared, deposits made but not yet credited, bank charges and interest not yet recorded, errors on either side.
A reconciliation that balances confirms that every movement in the bank has been recorded and every recorded movement has reached the bank; one that does not balance is an early warning of error or fraud. Physical cash is counted and compared with the petty cash or till record in the same way.
Frequency depends on volume: daily for retailers, weekly or monthly for smaller businesses. Because cash is the easiest asset to steal and the hardest to trace once gone, the cash account is surrounded by segregation of duties: the person who receives cash should not record it; the person who records it should not reconcile it; the person who authorises payments should not make them.
Small businesses that cannot separate all these roles compensate with owner review of the bank statement and reconciliation, dual signatures on payments above a threshold, and surprise counts.
In practice
Real-world examples.
Example
A retailer reconciles its till cash accounts daily, investigating any difference over $20 between the till record and the count.
Example
A charity keeps separate cash accounts for its unrestricted funds and each restricted grant, so that reconciliations also confirm the grant money is intact.
Example
A company treats its money market fund holding of $2 million as a cash equivalent and its 12-month term deposit as an investment.
Think of it
“The cash account tracks your money-all the cash you have on hand and in the bank.
Formula
Calculation
Closing Cash Balance = Opening balance + Receipts minus Payments
Reconciled Bank Balance = Bank statement balance + Deposits in transit minus Unpresented cheques or pending payments, which should equal the Cash account balance after recording bank items not yet in the ledger
Worked example. A design studio's main bank cash account shows an opening balance on 1 June of $42,300. During June:
- Customer receipts recorded: $88,700
- Payments recorded: suppliers $31,200; salaries $38,500; rent $6,000; other $4,150 (total $79,850)
- Closing balance per the cash account = $42,300 + $88,700 minus $79,850 = $51,150
The bank statement at 30 June shows $54,720. Reconciliation:
- Deposit of $3,800 banked on 30 June, not yet on the statement: add to bank balance
- Two supplier payments totalling $8,350 sent on 29 June, not yet cleared: deduct from bank balance
- Bank charges of $45 and interest received of $25 on the statement, not yet in the ledger: record in the cash account (net minus $20)
- A customer payment of $1,000 on the statement not yet identified or recorded: record in the cash account and investigate which invoice it settles
Adjusted bank balance = $54,720 + $3,800 minus $8,350 = $50,170
Adjusted cash account = $51,150 minus $20 + $1,000 = $52,130
The two do not agree; the ledger is $1,960 higher than the adjusted bank figure. Investigation finds two errors in the ledger. A customer receipt of $3,920 was recorded twice, overstating the ledger by $3,920. A supplier payment recorded as $2,150 was actually $190, a keying error that overstated payments and so understated the ledger by $1,960. Correcting both: $52,130 minus $3,920 + $1,960 = $50,170, which agrees with the adjusted bank balance. Two errors that would each have led to wrong decisions (one overstating cash, one understating it) have been found in a single month's review, and the reconciliation now balances without any unexplained item.Case study
Seen in the real world.
A wholesaler with revenue of $9,000,000 had one bookkeeper who received customer cheques, recorded them, banked them and reconciled the bank account. The owner reviewed the profit and loss account monthly and never the reconciliation. Over four years the bookkeeper diverted $310,000 by depositing some customer cheques into an account in a similar name, recording the receipts in the ledger against the customers' accounts so that no one chased them, and forcing the bank reconciliation with a growing "timing difference" that reached $310,000 before a new auditor asked what it was.
The company recovered $40,000 from its insurer. The controls it introduced cost almost nothing: the post is opened by two people who list the cheques received before they go to the bookkeeper; customers are encouraged to pay by transfer; the owner receives the bank statements directly and reviews the reconciliation every month, with any reconciling item older than two weeks explained; and payments above $2,000 need her second approval in the banking system. The auditor's comment was that a cash account reconciliation that balances only with a plug figure has not been reconciled at all.
Watch out
Common mistakes.
- Letting one person receive, record and reconcile cash. Segregation of these duties is the primary defence against theft.
- Forcing a reconciliation to balance with an unexplained adjustment. Every reconciling item must be identified and should clear within days.
- Treating long-term deposits, restricted balances or investments as cash, which overstates liquidity.
Questions
People also ask.
What is the difference between cash and cash equivalents?
Cash is money on hand and in demand accounts. Cash equivalents are short-term, highly liquid investments (typically maturing within three months) readily convertible to known amounts of cash.
How often should the cash account be reconciled?
At least monthly; daily or weekly for businesses with high transaction volumes or physical cash.
Why is the cash account balance different from the bank statement?
Timing: items recorded by one party and not yet by the other. The reconciliation lists them and confirms that, once allowed for, the two agree.
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