Definition of Cash

Cash refers to physical currency, coins, and readily available funds held by an individual or business. In Canadian accounting, cash includes legal tender such as Canadian dollars (CAD) in hand, deposits in chequing accounts, and other funds accessible on demand without restriction.

For example, a retail store in Montreal may keep $2,000 in a till and $15,000 in a business bank account—both amounts are classified as cash on the balance sheet.

Purpose of Cash in Business and Financial Reporting

Cash is the most liquid asset and plays a central role in managing business operations and fulfilling financial obligations:

1. Enables Daily Transactions – Facilitates purchases, payroll, and bill payments.
2. Maintains Liquidity – Ensures the company can meet short-term obligations.
3. Supports Financial Planning – Helps monitor and forecast cash flow.
4. Improves Creditworthiness – Strong cash balances support loan applications and investor confidence.
5. Required for CRA Compliance – Supports timely payment of taxes and remittances.

Types of Cash in Canadian Accounting

Cash on Hand

Physical currency held at business premises for day-to-day use, such as till floats and petty cash.

Cash at Bank

Deposits held in chequing or current accounts, available immediately for withdrawal or payment.

Foreign Currency

Cash held in foreign denominations is recorded at the exchange rate in effect at the reporting date.

Undeposited Funds

Customer payments received but not yet deposited are classified as cash, depending on the accounting system.

Advantages and Disadvantages of Holding Cash

Advantages

• Immediate Availability – Can be used instantly for transactions or emergencies.
• Improves Flexibility – Allows businesses to respond to unexpected costs or opportunities.
• Reduces Reliance on Credit – Minimizes borrowing and associated interest.
• Simplifies Transactions – Especially for small or cash-based operations.

Disadvantages

• Low or No Return – Idle cash generates minimal income.
• Inflation Risk – Purchasing power may decline over time.
• Security Concerns – Physical cash can be lost or stolen.
• Opportunity Cost – Funds could be invested for higher returns.

Related Terms

• Cash vs. Cash Equivalent – Cash refers to physical or demand deposit funds; cash equivalents are short-term investments easily converted to cash.
• Cash Flow – Measures the movement of cash into and out of a business over time.
• Petty Cash – A small reserve of cash used for minor or incidental expenses.
• Bank Reconciliation – A process that compares cash records with bank statements to identify discrepancies.

Interesting Fact

Did you know? In Canada, businesses are legally required to report cash transactions of $10,000 or more to FINTRAC (Financial Transactions and Reports Analysis Centre of Canada) to prevent money laundering and terrorist financing.

Statistic

According to the Bank of Canada, as of 2023, more than 80% of Canadian transactions are conducted electronically. Yet, cash remains in circulation at record levels, largely for emergency use and small purchases.

Frequently Asked Questions (FAQ)

1. What qualifies as cash in accounting?

Cash includes physical currency, coins, bank deposits, and other funds that are readily accessible and unrestricted.

2. Is a bank account considered cash?

Yes. Chequing and current accounts with immediate access are classified as cash in financial statements.

3. How is cash recorded in Canadian financial statements?

Cash is listed under “Current Assets” on the balance sheet and impacts the statement of cash flows.

4. Can foreign cash be included as cash?

Yes, but it must be translated into Canadian dollars using the exchange rate at the reporting date.

5. What’s the difference between cash and petty cash?

Cash refers broadly to all available funds; petty cash is a small, designated amount used for minor purchases or reimbursements.