If you have ever looked over a company's balance sheet, you have no doubt noticed the first account under the current asset section is cash and cash equivalents. The cash account contains, as the name suggests, all of the company's cash, while the cash equivalents account represents highly liquid investments the company can convert to cash within a few days. The cash that is listed as such on the company's books will be stored in a bank account, or equivalent financial institution, where the company can pay its liabilities and expenses.

The company may also keep a small amount of cash in its office for smaller office-related expenses. This is called petty cash, and this would also be recorded in the cash account on the balance sheet.

The cash equivalents that a company carries on its books are short-term investments that are highly liquid, and are considered to be just like cash because they can be quickly converted into cash at a fair price. This means that the cash equivalents account contains all very short-term investments that can be sold at a reasonable price and within a few days. So, if a company wants to use some of its cash equivalents to pay some of its bills, it could just sell some of its cash equivalents and use the proceeds to do this. Examples of cash equivalents include money market accounts and Treasury bills (T-bills).

A money market account is very similar to a bank account, but the interest that a company can earn on this account is slightly higher. There may be some restrictions imposed on the firm for using a money market account, such as a maximum number of transactions within the account during a specified period, or even minimum deposit requirements. Treasury bills can also provide the company with another alternative to a regular bank account. T-bills are government debt issues that are sold at periodic intervals and can be resold within a public market at any time by the company, which is why they are classified as cash equivalents.

To learn more about understanding the financial statements, read Introduction To Fundamental Analysis.

  1. Are mutual funds considered cash equivalents?

    Though all mutual funds are considered liquid assets, only certain funds are considered cash equivalents. What Is a Cash ... Read Full Answer >>
  2. Are dividends considered an asset?

    Whether dividends paid on stock are considered an asset depends on which role you play in the investment: the issuing company ... Read Full Answer >>
  3. What is a profit and loss (P&L) statement and why do companies publish them?

    A profit and loss (P&L) statement, or balance sheet, is essentially a snapshot of a company's financial activity for ... Read Full Answer >>
  4. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  5. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
  6. Who actually declares a dividend?

    It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important ... Read Full Answer >>
Related Articles
  1. Economics

    Calculating Days Working Capital

    A company’s days working capital ratio shows how many days it takes to convert working capital into revenue.
  2. Investing

    What is EBITA?

    EBITA measures a company’s full profitability before reducing it by interest, taxes and amortization considerations, and so is useful for calculating a company’s internal efficiency or profitability ...
  3. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  4. Investing

    How to Effectively Monitor Your Stock Holdings

    Investors should concentrate on the business, not the stock price.
  5. Economics

    Understanding Explicit Costs

    Common examples of explicit costs include wages, utilities, rent, raw materials, and other direct expenses companies pay to conduct business.
  6. Bonds & Fixed Income

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  7. Bonds & Fixed Income

    What's a 10-Year Treasury Note?

    A 10-year Treasury note is an intermediate debt obligation issued by the United States government, and with a ten-year maturity date.
  8. Mutual Funds & ETFs

    Top 3 China Bonds ETFs

    Explore detailed analysis of three exchange-traded funds (ETFs) that track the Chinese bond market, and learn about the suitability and characteristics of these ETFs.
  9. Mutual Funds & ETFs

    Top 4 Treasurys ETFs

    Learn about the specifics of the top four U.S. Treasury ETFs and how investors can buy ETFs that invest in bonds along the yield curve.
  10. Mutual Funds & ETFs

    Top 5 TIPS ETFs

    Learn about exchange-traded funds that invest in U.S. Treasury inflation-protected securities of different durations and yields to maturity.
  1. EBITA

    Earnings before interest, taxes and amortization. To calculate ...
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  4. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  5. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular ...
  6. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!