Cash

Definition

Cash refers to the most liquid form of an asset, representing currency, coins, and funds immediately available in bank accounts. It is a critical component in various accounting processes, including recording transactions, completing the accounting cycle, and analyzing merchandise sales and purchases.

5 Must Know Facts For Your Next Test

1. Cash is the most liquid asset on a company's balance sheet, allowing for immediate access and use in business operations.
2. Proper recording of cash transactions is crucial in journal entries, as cash is affected in nearly every business transaction.
3. Cash plays a central role in the accounting cycle, as it is the starting point for many transactions and is included in the preparation of financial statements.
4. The perpetual inventory system requires careful tracking of cash inflows and outflows related to merchandise sales and purchases.
5. Bond issuance and repurchase transactions involve the exchange of cash, which must be accurately recorded in the company's accounting records.

Review Questions

• Explain how cash is recorded in journal entries and how it is used to post to T-accounts.
  • Cash is a key element in recording transactions through journal entries. When a cash transaction occurs, the cash account is debited or credited depending on whether cash is being received or paid out. These journal entries are then used to post the cash-related information to the corresponding T-accounts, allowing for the tracking and analysis of cash movements within the accounting system.
• Describe the role of cash in the comprehensive accounting cycle for a business.
  • Cash is a central component of the accounting cycle. It serves as the starting point for many transactions, and its inflows and outflows are carefully recorded and reconciled throughout the cycle. Cash is included in the preparation of the trial balance, adjusting entries, financial statements, and the post-closing trial balance, ensuring the accurate representation of a company's cash position and its impact on the overall financial health.
• Analyze how cash is recorded in transactions for the sale and purchase of merchandise using both the perpetual and periodic inventory systems.
  • In the perpetual inventory system, cash inflows from merchandise sales are recorded as a debit to the cash account and a credit to the sales account. Conversely, cash outflows for merchandise purchases are recorded as a debit to the inventory account and a credit to the cash account. In the periodic inventory system, the recording of cash transactions for merchandise sales and purchases follows a similar pattern, with the key difference being the timing of when inventory changes are recognized.

Related terms

Cash Equivalents: Highly liquid short-term investments that can be readily converted into known amounts of cash, such as Treasury bills, commercial paper, and money market funds.

Cash Flow: The movement of cash into and out of a business, reflecting the inflows and outflows of cash from operating, investing, and financing activities.

Cash Basis Accounting: An accounting method where revenue and expenses are recorded when cash is received or paid, rather than when the transaction occurs.