What are cash and cash equivalents?

Definition

Cash and cash equivalents are the funds a business can spend today, plus very short-term holdings that convert to bank cash in a matter of days. On the books, this is a grouping of current assets, not a single checking account.

The group sits at the top of the Balance Sheet. It is an asset, and it sits with the other assets above inventory and unpaid invoices.

Equivalents are instruments close enough to cash that you can turn them into spendable funds almost immediately. A 90-day Treasury bill or a money-market sweep usually qualifies; a six-month certificate of deposit usually does not.

If you cannot pay a vendor from it this week without a penalty or a lender's permission, it does not belong in this group. Put pledged or trapped amounts on their own lines so the spendable total stays honest.

Where it shows up

Balance Sheet: Located in the current assets section.

P&L: Related to interest income on bank balances.

Cash flow: Increases in this section, reported cash from operating activities increases.

See also: Current Assets · Operating Bank Account · Bank Reconciliation

When you look at your Balance Sheet, this group is usually the first line under current assets. Checking, savings, the till, and true equivalents are often added together here.

A high total means payroll and vendors can be covered without borrowing. A low total means the next few weeks of bills may be tight, even if the shop is profitable.

The profit and loss statement does not list this group. Interest credited by the bank shows up as income, and bank fees show up as expense.

On the Statement of Cash Flows, this grouping is the thing being explained. Customer collections that raise the group are cash from operating activities.

How it works

The grouping goes up when customers pay, owners put money in, or the business borrows. It goes down when you pay vendors, run payroll, buy equipment, or repay debt.

Most of the daily movement hits the operating bank account. That checking account is usually the largest piece of the total.

A money-market sweep or a true equivalent sits in the same subtotal. The Balance Sheet reader cares that every dollar in the group is spendable, not that you have three bank logins.

Bank feeds import deposits and withdrawals into the books. A bank reconciliation then proves that the book total matches the bank, after outstanding checks and deposits still in transit.

Interest posted by the bank increases the group and hits income. NSF checks, chargebacks, and bank fees decrease the group.

At month end, you add the spendable accounts and present one subtotal. That subtotal is what owners and lenders mean when they ask how much cash you have.

Do not park money here if a loan agreement or a landlord can stop you from spending it. A compensating balance and a construction escrow belong outside this group, even though the bank still calls them cash.

The Accounts receivable line is not a member of this group. An unpaid invoice may turn into cash next week, but until the payment clears, you cannot spend it.

Example

A neighborhood bakery keeps $6,000 in checking, $2,000 in a money-market sweep, and $200 in the till. Those three amounts are the bakery's cash and cash equivalents, an $8,200 total it can spend.

On Saturday the bakery sells $1,200 of bread for cash at the counter. It records:

Debit: Cash $1,200

Credit: Sales $1,200

The group rises by $1,200, and the profit and loss statement records the sale. On the Statement of Cash Flows, cash from operating activities rises by the same $1,200.

Monday morning the baker can buy flour from that higher balance. The unsold loaves on the rack are inventory, not part of this group.

Common mix-ups

Cash and cash equivalents are not all of current assets. Inventory and unpaid invoices sit in the same section, but you cannot spend them today.

This group is not the same as restricted cash. Money pledged to a lender is still at the bank, just not available for general operations.

The till and the checking account are not two different Balance Sheet sections. They are both members of this group until you choose to show extra detail.

Related terms

• Current Assets: Assets expected to turn into cash or be used up within one year.
• Operating Bank Account: The main checking account through which day-to-day receipts and payments flow.
• Petty Cash: A small on-hand cash fund used for minor purchases and reimbursed on a set schedule.
• Restricted Cash: Cash that is set aside or pledged and cannot be used for general operations.
• Bank Reconciliation: Matching the book cash balance to the bank statement and explaining every difference.
• Cash Position: The amount of cash on hand at a given moment across all accounts.
• Net Change In Cash: The total increase or decrease in cash across all three cash-flow sections.
• Undeposited Funds: A holding account for customer payments received but not yet deposited at the bank.