A cash account is a brokerage account in which a customer is required to pay the full amount for securities purchased, and buying on margin is prohibited. The Federal Reserve's Regulation T governs cash accounts and the purchase of securities on margin. This regulation gives investors two business days to pay for security.
In accounting, a cash account, or cash book, may refer to an account in which all cash transactions are recorded. The cash account includes both the cash receipts journal and the cash payment journal.
Breaking Down Cash Account
In an investing context, investors who are actively trading must be careful not to violate certain regulations pertaining to cash accounts. For example, they must be sure to have sufficient cash in their account and not try to pay for the purchase of securities by selling other securities after the purchase date. An investor who has no cash in his/her account may decide on Monday to make a stock purchase worth $10,000. To pay for this, he/she may sell other stock on Tuesday worth $10,000. But this would be a violation because the purchase would settle two days later, on Wednesday, before the sale settled on Thursday, meaning there would be no cash to cover the trade. This is known as a "cash liquidation violation."
An active investor with a cash account and zero cash available must also not buy security and then quickly sell it before a previous sale has settled to provide the necessary cash. This is known as a "good faith violation."
Cash account investors (with zero cash available) must also avoid trying to pay for the purchase of a security with the sale of the same security. For example, an investor might purchase $1,000 worth of a stock on a Monday and fail to have enough cash to pay for it within two days. To pay for it, he/she might then sell the same stock on Thursday, the day after the purchase was to be settled. This is known as a "free riding violation."