Explanation:
Cash is the company’s current assets holding for small expenses in the office or for a certain large amount of cash transactions. For example, the company holds petty cash for making payments on small office expenses.
Sometimes, the company might keep a large amount of cash for making payments to certain suppliers that accept only cash rather than bank transactions like bank transfers or check.
The company might also hold the cash that it collects from customers but this kind of cash will be deposited into the company’s bank account the following day.
It does not matter whether the cash is used for small or large payments and it does matter if the cash is collected from customers or from whatever sources, from an accounting perspective, cash is considered an asset and it is classified as current assets which are reported in the balance sheet.
Is cash debit or credit?
Before diving into the debit or credit, we need to assess what kind of financial statements element that cash belongs to. Once we know the exact element, then we can clearly know whether cash is debit or credit.
As we mentioned above, cash is the assets and clearly, it is belonging to the assets element of the financial statements.
As long as it belongs to the assets element, the rule of debit or credit is applied the same.
Assets reporting in the balance sheet or statement of financial position. Decreasing assets result in credit records and increasing assets result in debiting to assets.
For example, if the company purchases a new computer, then the asset is increasing. We need to debit assets.
The same as an asset,
In financial statements, cash is debited when there is increasing in it. For example, the company receives the payment from the customers in cash. In this case, cash is increased and we need to debit it. If the cash is decreasing, then we need to record it on the credit side of the cash account.
For example, the company makes the payment to its supplier in cash. The cash is decreasing since the company making payments to its supplier through cash.
Cash journal entries:
The journal entries of cash transactions are similar to the journal entries of other assets accounts.
Here is how we record cash when it is increasing due to correct from customers,
| Account | Dr | Cr |
| Cash | XXXX | |
| Account receivables/sales | XXXX |
For example, the company receives a cash payment from its credit customer amounting to $1,000. Then, the entries are as below:
| Account | Dr | Cr |
| Cash | USD1,000 | |
| Account receivables/sales | USD1,000 |
Here is how we record cash when it is decreasing due to payment to suppliers,
For example, the company purchase office supplies amounting to USD500 and it pays its supplies through petty cash, then the entries are as below:
| Account | Dr | Cr |
| Office supplies | USD5,000 | |
| Petty cash | USD5,000 |
Cash as an asset:
An asset is defined as the resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Another criterion is:
- The inflow of economic benefits to the entity is probable
- The cost/value can be measured reliably.
Similarly, the value of cash can be measured reliably since it can be easily counted. Cash is always in the control of the company either with itself or its custodian as a bank. Cash is classified as a current asset. Current assets are assets that can be easily converted to cash and cash equivalents within a year or working capital cycle.
Cash can be also classified into tangible assets since it has a physical presence and can be touched. Cash can be defined as an operating asset since it is required in the daily operation of the business. In another sense, they are used to generate revenue from the company’s core operations.
Features of cash:
- Durability: Cash is highly durable and lasts long unless torn. It can be exchanged from banks if torn.
- Portability: It can be taken from one place to another easily. It is light weighted.
- Divisibility: Cash can be easily divided into smaller values. For example, a thousand-rupee note can be easily divided into 10 hundred-rupee notes.
- Limited supply: Cash is printed by central banks as per requirement and is in limited supply in the markets.
- Uniformity: Cash of different values comes in the same shape, size, and value.
- Acceptability: Since currency notes are printed and allowed for use by central banks, they are accepted everywhere.
Uses of cash:
Cash can be used for various purposes. Such uses can be categorized into three main uses viz.
Operating use:
Cash is used for the payment of operating expenses. The different expenses used for cash payments are:
- Payment to account payables and creditors
- Payment of business expenses
- Payment of interest to lenders
- Payments for purchase of raw materials
- Payment for income taxes
- Cash paid to vendors and suppliers
- Receipt from sales and debtors
Investment use:
Cash is used for investment purposes. The different investment activities are:
- Purchase of fixed assets
- Investment in securities
- Selling or leasing of fixed assets
- Selling off securities
Financing use:
Cash is used for the payment of loans, dividends. It is used for transactions involving debt, equity, dividends. It is used to manage the capital structure of the company. Cash moves here between a firm and its owners, investors, and creditors. The financing use of cash involves:
- Issue of stock equity, debt
- Payment of loan, dividend
- Raising loans and debentures
- Redemption of debt
- Stock repurchases
Conclusion: The item ‘cash’ is therefore DEBIT. It is shown as an asset owing to the advantage it brings to the business. It is therefore shown under the Current Assets of the Asset side of the Balance sheet.
