Cash and Cash Equivalents

In our daily life, we always need cash or money to buy food and clothing, to pay tuition fees, stationery and books, to pay our bills, to travel to any place we need to go, to satisfy the need of our family, and to buy everything we need in order to live. Cash is the medium of exchange.

We can say “cash” has special role not only in our life but also in the business. Cash intent to make the operation survive in their daily transactions weather it is small amount or big value of money.

In accounting the cash account can be identify as Cash, Cash on Hand, Cash in Bank, Petty Cash Fund, and other cash equivalents. Cash and cash equivalents are the most liquid assets.

Cash and cash equivalents refer to coins, money, bills and any currency with monetary value that are easily convertible into cash such as bank fixed deposit account, money orders, paper cheques, gift certificates, treasury bills, money market holdings, marketable securities, commercial papers, short-term government bonds and any stored value. Cash equivalents refer to other investments that can be matured in 3 months or any investment that can be matured within 12 months.

The cash and cash equivalents will be reported as the first caption of current assets in the balance sheet. It can be used to pay for the business operating expenses for normal operating cycle and capital expenditure to be used for long-term operation.

Cash comes from capital contributions of business owners, loans from the bank, sale of products and services, sale of assets and other sources of income. It depends upon the size of the company in controlling the cash fund, petty cash fund, revolving fund, or any cash reserve for any cash payable for daily transactions. Normally, most of the payable of the company should be paid in cheques. However, they should pay some other small payable which includes payment for snacks for representation expenses, for small repairs, small monthly dues, daily employees’ benefits (coffee, creamer, sugar and other small amount of things to motivate the staff), for transportation expenses to deposit the collected cheques and to go to regulatory authority for legal requirements and other urgent small payables.

Cash and cash equivalents are very important not only in our life but also in the business operation. The reality of life can be compare in business accounting transaction. Imagine if there is no cash in the world, do you think “barter” can still be effective? 

Current Assets

When we start business, we need to have resources that can able to use for normal operating cycle (means 12 months or within 1 year business operations). It includes cash, money, materials, properties, and other resources. The function is vital in the financial statement and it is called current assets. When we say current assets, it refers the most liquid assets that expected to be realized or intended for sale or for consumption in the normal business operating cycle.

In the balance sheet, the current assets are extremely important in the business. Current assets represent available to finance the daily business transaction. These are the cash, cash equivalent, or anything that has monetary value unless it is restricted from being exchanged or used to settle a liability for at least 12 months.

The current assets can be defined through the example as follows:

• Cash – It is the most liquid assets among other current assets. Cash can be coins and bills that frequently called cash on hand. The well-known petty cash fund is included in cash on hand however; other company separates this account from cash or cash on hand. On the other hand, the so-called cash in bank is also under the component of cash, which includes checking and savings accounts in the bank.
• Accounts Receivable – These accounts refer to any collectible from clients or customers by providing services or delivering products.
• Inventories – These are the current assets pertain to raw materials, cash value of products or any supplies on hand that can easily converted into cash.
• Prepaid Expenses – These are the expenses paid in advance that intended to consume or to use for 12 months. Rental, insurance, licenses, and other expenses paid in advance with issued postdated cheques are the example of prepaid expenses.

Current assets are very important in management of cash flow, forecasting, controlling, and budget development, and implementation. These accounts provide the liquidity of the business that can able to pay the debt and pay all the urgent small or big payable.

It shows that current assets have vital function in the daily accounting transaction. Keep in mind before running a business you have to plan and take necessary action to achieve the successful goal of your company.

Current Assets, Fixed Assets & Intangible Assets

The Assets in Balance Accounts represent the resources of the company claims made against assets, liabilities and equity made by the owners or stockholders. The assets accounts relate to the properties of the company that used in the business operations to generate income.

Assets have two classification current assets and long-term assets.

Current Assets use in the business operation during the period of 12 months and these are the most liquid assets. The following accounts includes in current assets:

Cash and Cash Equivalent

1. Cash in Bank

The company primary bank account is checking account used for business operations includes revenue deposits and payments of expenses.

2. Cash on Hand

The cash on hand account is the total amount of any existing cash. It refers to any available cash whether it is in the pocket or in the bank account. The investments that can convert in cash in 90 days or less are normally included in cash on hand.

3. Petty Cash Fund

Petty cash fund is the money that you keep on hand to make acceptable small payments.

Accounts Receivable

This account represents the receivables from customers who buy the product or render the company services and subject to issue invoices as billing to a customer on credit. The accounts receivable has agreed certain time, it is normally one month or any other agreed contract.

Inventory

The inventories are the value of the products on hand intends to sell to customers. It is generally used in the current business operation thus; it is included in the current assets.

Prepaid Expenses

This account represents the advance payment for expenses to be used in one year or current operating business cycle. For example, rent, insurance and other advance payments. It is subject to have accounting entry in order to record and to amortize each month based on the issued postdated cheque.

Long-term assets represent the anticipated assets that will use over 12 months or more than one year. These are the fixed assets help the business operation to generate income and to maintain company stability. Some of the most common long-term assets include the following:

Land

Land is purchased or donated and it is usually capitalized but not depreciated.  Land can be recorded at, and remain at, historical cost. The cost related in the realization of a structure can be capitalized and it is included in the cost of land. When land and a building are acquired as a package, most organizations separate values for each. 

Land Improvements

These accounts involve those that are permanent and add a significant value to the land, such as site improvements include fencing, excavation and infrastructure include driveways, parking lots and roads.

Buildings

Buildings are normally valued at the time of acquisition or construction. Professional fees include broker fees, architect fees, permits, and other related cost can be covered within this category. 

Building Improvements

Any cost of improvements that extend the useful life of a building includes roofing, remodeling, replacements and other related cost will include under the account of “Building Improvements”.

Furniture and Fixtures

Tables, chairs, cabinets, and any other stuff that use in the business operation are included in the furniture and fixtures account. The value to record of these accounts based on the cost of purchasing these items. These items are depreciated during their useful lifespan.

Equipment

This account pertains to computers, routers, servers, copiers, cash register, tools and other office equipment that use in the business operations are included in the equipment account. This equipment is intended to be used for more than one year. Equipment accumulates the depreciation based on their useful life and subject for replacement as soon as it is fully depreciated.

Vehicles

This account refers to cars, trucks, or other vehicles owned by the company and use to generate income in the business. The initial value of any vehicle is listed in this account based on the total cost paid to put the vehicle in service. Vehicles also depreciate through their useful lifespan.

Accumulated Depreciation

The following accounts refer to the fixed assets accumulate the depreciation expenses based on their useful life.

• Accumulated Depreciation - Building
• Accumulated Depreciation - Building Improvements / Leasehold Improvements
• Accumulated Depreciation - Furniture & Fixtures
• Accumulated Depreciation - Equipment
• Accumulated Depreciation - Vehicle

Intangible Assets that are non-monetary assets those are without substance and identifiable or other legal rights. Intangible assets pertain to relevant recognition criteria measured at cost, subsequent measured at cost or use the revaluation model and amortized on a systematic basis over their useful lives except these accounts have an unspecified useful life that is not subject to amortized. The following accounts included in long term assets.

Goodwill

This account refers to intangible value of purchase for things related to company reputation, strong brand name, good customer relations, good employee relations, store locations, and customer base. Goodwill pertains also when a company is purchased by another company; the amount paid for the company over the book value usually accounts for the target firm's intangible assets.

Copyrights

This account refers to the costs incurred to establish copyrights. This legal right terminates after a set number of years, so its value is subject to be amortized as the copyright used it up.

Organization Costs

These accounts involve initial start-up expenses to get the business off the ground. Special licenses and legal fees must be written off over a number of years using a method similar to depreciation called amortization.

Amortization - Organization Costs

This account relates the accumulated amortization of organization costs during the period in which they’re being written-off.

Patents

The patent account includes the costs associated with patents, grants made by governments that guarantee to the inventor of a product or service the exclusive right to make, use, and sell that product or service over a certain period. Patent costs should be amortized.

Amortization – Patents

This account refers to the accumulated amortization of a business’s patents.

Asset category is the first part of balance sheet and other part will be discussed in the next article. See you in the next part of this module.