CASH
Accounting Theory
Accounting theory indicates that a unit of exchange is necessary in accounting to measure economic transaction.
That unit of exchange is the same as used in all business activities the dollar. That monetary unit measures all
that is recorded in the accounting process. Money capital is the unit of measure assumption. Money capital is
invested in the business activities and produces money revenue which returns to money capital. Formation of
capital is reported on the Balance Sheet. Money revenue is reported on the Income Statement. Full disclosure
reporting is required for cash and temporary investments.
Cash and Temporary Investments
In periods of economic contraction, economic uncertainty and political uncertainty either nationally or globally
business begin to focus on stabilizing their Balance Sheets. Cash is accumulated as a risk management practice
and the solvency of the business is enhanced. When considering cash it becomes necessary to include
temporary investments.
Cash is the unit of exchange and unit of measurement in accounting. Cash includes currency, various bank
monetary instruments including checks, ACH transactions, wires, demand certificates of deposits and formal
negotiable paper. Cash is a current asset only if it is restricted to withdraw for current operations What
distinguishes cash from temporary investments is that cash must be subject to immediate withdrawal.
Temporary investments include savings accounts, time certificates of deposits and investments in marketable
securities including stocks and bonds. Temporary investments are a current asset if the security is regularly
traded on a security exchange and management intends to convert the securities to cash to be used within the
normal business operating cycle.
Internal controls are necessary for all sources of cash receipts and cash disbursements. Internal controls for
cash receipts would include control over the processes of collecting, recording and depositing the cash receipts.
Internal controls for cash disbursements would include control over the processes of invoice approval, recording
and payment including reviewing all cancelled checks. Bank reconciliations should be prepared and reviewed
timely and should include cash proofs of deposits and charges.
Temporary Investments
Temporary investments are a short term investment in marketable securities. They can be a parking place for
idle cash balances or have a purpose for use in a current operating cycle. Temporary investments are recorded
at cost. Changes in market value if material in amount can change the valuation from cost to the lower of cost or
market. The conservatism principle. Full disclosure on the Balance Sheet would state the method of valuation at
lower of cost or market and what the cost and market value is.
Gains and losses from the sale of temporary investments are reported on the income statement as a separate
item. Since they are not unusual or infrequent in nature they are not an extraordinary gain or loss. Unrealized
losses based on a material reduction in market value should also be reported on the income statement. Recovery
in market value of previous unrealized losses reported on the income statement should be reported on the
income statement.
CASH
Balance Sheet Reporting
Instead of crediting the temporary investment account an allowance account should be created to record the loss
due to a reduction of temporary investments from cost to lower of cost or market. If there is a further loss of
market value the allowance account is credited. If there is a recovery in market value the allowance account is
debited. Only when the temporary investments are sold and the loss realized is the temporary investment
account credited. If temporary investments consists of only a single investment the allowance account is
adjusted at the time the temporary investment is sold because a loss was previously recorded at the time of
the reduction in market value.
If temporary investments consist of more than a single investment the balance in the allowance account is
ignored when a temporary investment is sold. The allowance account is adjusted at the end of the year to report
the excess of cost over market value. If there is a further loss of market value the allowance account is
credited. If there is a recovery in market value the allowance account is debited.
Income Statement Reporting
Dividend and interest income from temporary investments is reported as non operating income. Gains and
losses from the sale of temporary investments or a loss from a material reduction in market value is reported as
other income or loss, a separate item.
Small Business is the Engine that Drives our Economy. The Men and Women who Work to make our Country Great
Should be Recognized for their Achievement and Courage in Very Difficult Economic Times.