In this glossary page, we’ll break down exactly what cash means in accounting, the different types of cash and cash equivalents, how to record it, and why understanding it is key to managing your finances.
Cash definition
In accounting, cash refers to money that a business can quickly access and use. This includes physical currency, money in checking accounts, and even petty cash kept on hand. Essentially, it’s the most liquid asset your business owns, ready to be spent, saved, or invested as needed.
The importance of understanding cash in accounting
Cash seems like a simple concept, but there’s more to it than just having money in hand or in the bank. Here’s why understanding cash in accounting matters:
Cash reflects your business’s financial health
Even profitable businesses can fail if they don’t have enough cash to cover day-to-day expenses like payroll, rent, or supplier payments.
It’s central to key financial statements
The cash flow statement tracks how money moves in and out of your business, helping you understand liquidity and spot potential issues early.
It affects how you track income and expenses
If you use cash basis accounting, you only record income when you get paid and expenses when you pay them. That means tracking cash is essential to keeping your books accurate.
It helps you make smarter decisions
When you know how much cash you actually have on hand, it’s easier to decide when to spend, when to save, and when to hold off on a big purchase or hire.
It keeps your business organized and audit-ready
Properly tracking and reporting cash helps your books stay clean, accurate, and ready for tax season or investor review.
Explaining cash equivalents
Cash equivalents are short-term, low-risk investments that are easy to convert into cash, usually within 90 days. While they’re not technically cash, they’re treated almost the same in accounting because they’re so liquid and stable.
We’ll break down the different types of cash equivalents in the next section.
Types of cash and cash equivalents
In accounting, cash and cash equivalents include the money your business can access right away, along with a few short-term investments that are nearly as liquid. These are grouped together on the balance sheet because they can all be used to pay expenses quickly and easily.
Types of cash
Here are the most common forms of cash recognized in business accounting:
- Physical currency: This includes coins and paper money held on the business premises.
- Checking account balances: This is money in business bank accounts that’s available at any time for payments, transfers, or withdrawals.
- Petty cash: This is a small reserve of physical cash set aside for day-to-day expenses, such as office supplies, travel costs, or minor reimbursements.
- Cash in transit: This is money that’s been received (such as a check or deposit) but hasn't yet cleared or been recorded in the bank account.
Types of cash equivalents
Take a look at some common types of cash equivalents:
- Treasury bills (T-bills): Short-term government securities that mature in less than 90 days.
- Money market funds: Low-risk investment accounts that can be quickly turned into cash.
- Commercial paper: Unsecured, short-term loans issued by corporations, typically maturing in a few weeks.
Cash flow
Cash flow refers to the movement of money into and out of your business over a specific period. It shows whether you have enough cash coming in to cover your bills, maintain operations, and invest in growth. Unlike profit, which can include non-cash items like depreciation, cash flow focuses only on real money you can spend or reinvest.
Positive cash flow
Positive cash flow means your business is bringing in more money than it’s spending. This gives you the flexibility to grow, pay down debt, or set aside cash reserves. It also shows investors or lenders that your business is stable and self-sufficient.
Free cash flow (FCF)
Free cash flow (FCF) is the money your business has left over after covering operating expenses and capital expenditures (like equipment or property upgrades). It’s the extra breathing room your business has to expand, innovate, or simply stay flexible. It’s also a key metric for investors because it shows them your business can grow without constantly relying on external funding.
Understanding cash in various scenarios
In accounting, how you define and track cash can shift slightly depending on the financial context—like running your business day to day or preparing financial statements. Here’s a look at what cash means in two common scenarios:
Cash in business operations
Cash refers to the actual funds your business uses to keep operations running— e.g., paying vendors, covering rent, making payroll, and buying supplies. It includes both physical money and the balances in your checking accounts that you can access quickly.
Good cash management helps keep your business stable. Without enough cash on hand, even for a short time, you could struggle to pay bills or meet immediate needs, which can lead to serious financial trouble. That’s why financial forecasting and budgeting your cash flow is so important.
Cash in balance sheets
On your balance sheet, cash is listed right at the top under current assets. That’s because it’s the most liquid asset your business owns—i.e., it’s money you can use right now.
This includes:
- Cash in the register or on-site
- Funds in your business bank account
- Petty cash for day-to-day expenses
Lenders and investors look at your cash position to see how well your business is managing its finances. A healthy cash balance shows that you can cover short-term expenses and respond quickly if something unexpected comes up.
Is cash an asset?
Yes, cash is considered an asset. It’s part of a broader category called current assets, which includes anything expected to be used or turned into cash within one year. This also includes accounts receivable, inventory, and certain short-term investments. But unlike those, cash is already in its final, spendable form, so there’s no waiting or conversion involved.
Is cash the same as profit?
No, cash is not the same as profit.
Cash is the actual money your business has in the bank or on hand right now. It’s what you use to pay your bills, buy supplies, and keep the lights on. On the other hand, profit is what’s left over after you subtract your expenses from your revenue. It shows whether your business is making money overall, but it doesn’t necessarily mean that money is in your pocket yet.
For example, your business might show a profit on paper because you've booked a big sale, but if the customer hasn't paid yet, that profit hasn’t turned into cash. On the flip side, you might have plenty of cash in the bank but still operate at a loss if your expenses outweigh your revenue.
How to record cash in accounting
Whether you're receiving payments or paying expenses, you should document every cash transaction in your accounting system.
Here’s how it typically works:
Step 1: Choose your accounting method
If you use cash basis accounting, you record income when you actually receive the money and expenses when you pay them. If you use accrual accounting, you record transactions when they’re earned or incurred, even if the cash hasn’t moved yet.
Step 2: Use a cash receipts journal
When your business receives cash—whether from a sale, a loan, or a refund—you log it in your cash receipts journal. This record includes the date, amount, payer, and reason for the payment.
Step 3: Use a cash disbursements journal
Any time you spend cash (like paying a bill, buying supplies, or reimbursing an employee), it gets recorded in the cash disbursements journal with the same details: date, amount, payee, and purpose.
Step 4: Post to the general ledger
Once you’ve logged everything in your journals, you’ll transfer that info to your general ledger, which is the master record that tracks all your accounts and keeps your books balanced.
Step 5: Use accounting software to make it easier
You can save time and reduce mistakes by using accounting software like QuickBooks. These programs help you automatically log, categorize, and reconcile cash transactions so you save time and reduce the risk of errors.
Making the most of your cash
Understanding what cash is—and how it works in accounting—is essential to maintaining a financially healthy and informed business. By grasping the nuances of cash, you’ll be better equipped to manage day-to-day operations, keep accurate records, and plan confidently for the future.
