What are cash and cash equivalents?
Cash and cash equivalents are the most liquid assets that are reported in the asset section of a company’s balance sheet. It is the first account of your balance sheet and accordingly in your chart of accounts. Cash includes money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. This means that cash includes bills, coins, checks, bank drafts and money orders because they are acceptable by the bank for deposit or immediate encashment. Postdated checks are not considered as cash yet because these checks are unacceptable by the bank for deposit and immediate credit or outright encashment. These checks will only be considered as cash when their indicated dates arrive. Cash must be unrestricted in use. This means that an item to be recognized and reported as cash must be readily available in the payment of current obligations and not subjected to any restrictions.
Cash equivalents are short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The International Accounting Standard (IAS) further states that “only highly liquid investments that are acquired three month before maturity can qualify as cash equivalents. Cash equivalents include three-month time deposits, three-month money market instruments, and three-month treasury bill. Equity securities cannot qualify as cash equivalents since shares of stocks do not have a maturity date.