What Is Included in Cash and Cash Equivalents?

Cash and cash equivalents are a fundamental concept in financial reporting, important for understanding a company’s immediate financial standing. This line item, typically appearing at the top of the current assets section on a balance sheet, indicates the money a company has readily available. It provides insights into an entity’s liquidity and capacity to meet short-term financial obligations. Accurate reporting of these assets is important for investors, creditors, and other stakeholders assessing an organization’s financial health.

Components of Cash

“Cash” within financial accounting encompasses the most liquid forms of money. This includes physical currency (coins and banknotes) held on hand. It also covers demand deposits in checking accounts, which are immediately accessible. Savings accounts are generally considered cash if funds can be withdrawn without prior notice or penalty. These components represent funds that are unrestricted and available for a company’s general use without conversion or delay.

Characteristics of Cash Equivalents

Assets must meet specific criteria to be classified as “cash equivalents” alongside cash. They must be readily convertible to known amounts of cash, meaning their value can be quickly transformed into a specific monetary sum without significant risk of value changes. Cash equivalents must also be so near their maturity that they present an insignificant risk of changes in value due to interest rate fluctuations. This generally translates to an original maturity of three months or less from the acquisition date. The term “original maturity” refers to the maturity period from the initial purchase date by the company, not the remaining time until maturity if the investment was acquired long ago.

Common Examples of Cash Equivalents

Building on these characteristics, several financial instruments commonly qualify as cash equivalents. Treasury Bills (T-Bills) are short-term debt securities issued by the U.S. government, known for their low risk and short maturities. When purchased with an original maturity of three months or less, they are readily convertible to a known amount of cash with minimal risk, fitting the criteria for a cash equivalent. Commercial paper consists of unsecured, short-term promissory notes issued by corporations. These usually have maturities of less than 270 days, making them highly liquid and, when acquired with an original maturity of three months or less, they qualify as cash equivalents. Money market funds are mutual funds investing in short-term, high-quality debt instruments, such as government securities and commercial paper, providing both liquidity and a stable value. Short-term Certificates of Deposit (CDs) with an original maturity of three months or less also meet the criteria, offering a fixed return and being generally redeemable at a known amount upon maturity.

Items Not Classified as Cash and Cash Equivalents

Not all liquid or short-term financial items are classified as cash and cash equivalents.

Restricted cash refers to funds held for specific purposes or contractual obligations, making them unavailable for general use. This cash is not freely accessible, such as funds held in escrow or as collateral for a loan.

Investments with longer maturities, even if liquid, are typically not cash equivalents. For example, marketable securities with an original maturity exceeding three months, or those subject to significant price fluctuations, are excluded. Their longer maturity or higher risk of value changes disqualifies them from being considered “near cash.”

Accounts receivable, amounts owed to a company by its customers for goods or services delivered, are also not cash equivalents. Similarly, inventory (goods held for sale) is not a cash equivalent because its conversion to cash involves a sale process and potential valuation changes.