7 Cash Account
Controls and Bank Reconcilliation
Dr. Jacqueline Gagnon
What gets Included in Cash and Cash Equivalents?
Cash isn’t just money held in the company’s chequings or savings account at the bank. The cash account also includes petty cash, cash in registers, cash in the office safe. In brief, cash is all money held by the company, whether that money is on the company’s premises or in the company’s bank account.
Most companies report cash and cash equivalentsCash Equivalents:
Short-term investments that are not subject to market fluctuations such as short-term treasury notes or Guaranteed Income Certificates (GIC). Cash equivalents are combined with cash on the Statement of Financial Position in the line item: Cash and cash equivalents. See also: Cash. on their Statement of Financial Position. What does cash and cash equivalents mean? Well, you already know what cash is: money on the company’s premises or in their bank account. Cash equivalents are short term investments that are not subject to market fluctuations. There are two parts to this definition of cash equivalent: (1) short term, meaning that these investments come due within three months and (2) not subject to market fluctuations, meaning not shares.
This is getting heavy. Perhaps a table would be helpful. Below is a listing of accounts that are classified as cash and cash equivalents.
| Account | Description | Classification |
|---|---|---|
| Petty Cash | Cash kept for administrative purpose such as reimbursement for costs incurred by employees or owners (e.g., a manager buys food for an office meeting and is reimbursed from petty cash). | Cash |
| Cash in Register | Cash kept in cash registers to facilitate sales (i.e., at check out). This is common in retail stores. For example, when you buy groceries, the cashier has cash in the register to provide change to customers who pay in cash. | Cash |
| Cash in Office Safe | Some companies keep cash in a safe on their premises. It is good practice to secure excess cash to reduce opportunities for theft or other loss. | Cash |
| Chequing Account | Cash in bank. The purpose of a chequing account is to facilitate payments and receipts. For example, a company can send and receive e-transfers and cheques, and make bill payments through their chequing account. You may have a personal chequing account. A corporate chequing account works much the same as your personal account. | Cash |
| Savings Account | Cash in bank. A savings account is a bit different from a chequing account. Because a savings account is not designed for cash payments and receipts, it is safer (i.e., less likely to be stolen) than cash in a chequing account. Usually a (very) small amount of interest is paid on cash in savings. | Cash |
| Investment Bank Account | Many companies have investment bank accounts with a much higher interest rateInterest Rate: The rate used to calculate interest payments on loans: principal owing x interest rate. The interest rate on a loan is expressed as an annual rate. If interest is paid semi-annually or monthly, a company first has to prorate the interest rate on the same basis. For example, a 12% (annual) interest rate can be expressed as 6% semi-annually (12% x 6/12 months) or 1% monthly (12% x 1/12 months). than their savings account. Transfers from an investment bank account to chequing account usually take 24-48 hours. Companies use this type of investment account to secure their cash since transfers take time and are only transferrable into the company’s chequing account. Companies also receive interest on investments. |
Cash |
| Short-Term Investments | GIC (guaranteed income certificate) or other short-term investment that pays interest income. These investments are referred to as term deposits because cash invested cannot be withdrawn for a specified period of time. That means it is inaccessible to the company, or subject to significant penalties if withdrawn early. To be classified as a cash equivalent, the investment must be redeemable within three months of the financial statement date. Investments that mature in over three months and/or are subject to market risk are not cash equivalents. They are classified as investments under either current assets (where the remaining term is between three months and one year), or non-current assets (where the remaining term is greater than one year). |
Cash Equivalent |
Some companies may have all these accounts, but most won’t. Importantly, a company uses a detailed set of accounts for bookkeeping, also known as their internal accounting but they don’t publish all this detail in their financial statements. For example, a company may have bookkeeping accounts for petty cash, a chequing account, and short-term investments. This company will add up these three account balances and report the total as cash and cash equivalents on the Statement of Financial Position: one line item.
Let’s practice aggregating accounts and preparing the cash and cash equivalents balance.
- My Turn:
- Xavier Ltd.’s 20X1 trial balance begins with current assets. See below:
-
Account Balance (DR) Petty Cash 500 Cash in Registers 1,200 Cash in Central Bank (#124 265 892) 43,000 Guaranteed Income Certificate (GIC) 25,000 Accounts Receivable 30,000 Inventory 67,000 Prepaid Rent 10,000 Trading Investments 28,500 - The GIC had a one-year term originally, but only one month remains until maturity. Trading investments are stocks traded on an exchange. All balances are in Canadian dollars.
- Xavier is confident in their accounting but is unsure which accounts should be included in cash and cash equivalents on the Statement of Financial Position.
- Required:
- Calculate cash and cash equivalents for Xavier at their year ended 20X1.
Calculation of cash and cash equivalents:
| Petty Cash | 700 |
|---|---|
| Cash in Registers | 1,200 |
| Cash in Central Bank | 43,000 |
| GIC | 25,000 |
| Total Cash and Cash Equivalents | 69,900 |
Notes: The GIC will mature in less than three months, and is not subject to material changes in value, so it is considered a cash equivalent. Trading investments are stocks which are subject to changes in value, so these investments are not eligible for the cash equivalent category.
Alright, now that we’ve done one together, give it a try on your own. Calculate cash and cash equivalents!
Great progress. Just one more – let’s go!!
Fantastic! Let’s move on to internal controls – how to keep cash from going missing or being stolen.