Cash Account

The Cash account is the general ledger asset account in which a business records its money available for immediate use: currency and coins on hand, customers' checks not yet deposited, and balances in checking and other demand accounts at banks. It is usually the first account in the chart of accounts and the first item listed among current assets on the balance sheet, often combined with short-term investments as cash and cash equivalents.

The account is distinct from cash as a general idea: it is a specific ledger record whose balance should match, after reconciliation, the money the business actually controls. Many organizations keep several cash accounts, one for each bank account and one for petty cash and cash registers, and add them together for reporting.

The Cash account is the business's own running tally of its money. Every time money comes in, from a customer, a loan or an owner, the tally goes up. Every time money goes out, to pay a supplier, an employee or the rent, it goes down.

The bank keeps its own tally of the same money. Once a month the business compares the two and explains any differences, so it can be confident that the figure in its books is real.

Cash is an asset, so its normal balance is a debit. Receipts are debited to Cash and payments are credited.

• A customer pays a $2,500 invoice: debit Cash, credit Accounts Receivable.
• The company makes a $900 cash sale: debit Cash, credit Sales Revenue.
• The company pays a $1,200 supplier bill: debit Accounts Payable, credit Cash.
• The owner invests $10,000: debit Cash, credit the owner's capital account or common stock.

In a manual or special-journal system, most receipts are recorded in the cash receipts journal and most payments in the cash payments journal, and only the monthly totals are posted to the Cash account. Accounting software posts each transaction automatically but follows the same logic.

Cash includes items a bank will accept for immediate deposit: currency, coins, checks, money orders and balances that can be withdrawn on demand. It does not include postage stamps, IOUs from employees, postdated checks, or certificates of deposit with withdrawal penalties, which are recorded as receivables, prepaid items or investments. Cash set aside for a specific purpose, such as a bond sinking fund or a lender-required compensating balance, is shown separately as restricted cash.

If a bank account is overdrawn, the negative balance is normally reported as a current liability rather than netted against other cash, unless the company has a right of offset with other accounts at the same bank, as discussed under bank overdraft.

Because cash is the asset most vulnerable to theft and error, the Cash account is reconciled to the bank statement every month. The bank reconciliation adjusts the bank balance for deposits in transit and outstanding checks, and the book balance for bank fees, interest, returned checks and errors. Adjustments to the book side require journal entries; once they are posted, the Cash account shows the true balance.

Other controls include depositing all receipts intact each day, paying by check or electronic transfer rather than cash, requiring approval for disbursements and keeping segregation of duties between people who handle cash, record it and reconcile it. Small differences found when counting registers or petty cash are recorded in a cash short and over account.

The change in the Cash account balance from the start to the end of the year, together with any cash equivalents, is exactly what the statement of cash flows explains. Every debit and credit to Cash during the year falls into operating, investing or financing activities. If the opening balance was $48,000 and the closing balance $63,000, the three sections of the cash flow statement must add up to an increase of $15,000. This makes the Cash account a useful check: any reconciliation or classification error will show up as a difference between the statement and the ledger.