Meaning and Definition of Cash and Cash Equivalents :
Cash and cash equivalents are related to the line detail on the balance sheet that summarises the value of a business’s assets that are cash or can be transformed into cash instantly. These comprise marketable securities, bank accounts, short-term government bonds, commercial paper and Treasury bills with a maturity date of 3 months or less. Marketable bonds and money market holdings are estimated cash equivalents as they are liquid and not directed to substantial variations in state.
As mentioned earlier :
- The cash flow report depicts the outflows and inflows of cash and cash equivalents of different actions of the firm during a distinct time
- According to the Accounting Standard -3, ‘Cash’ includes funds in hand and demand securities with the banks (financial institutions) and ‘Cash equivalents’ involves short-term extremely liquid financing that are easily changeable into established values of cash and which are subjected to a petty peril to differences in the value
- Financing usually fits as cash equivalents when it has a low maturity, 3 months or less from the date of purchase
- Investments in shares are ejected from cash equivalents except they are in real cash equivalents. For instance, preference shares of a firm obtained soon ere their particular reclamation date furnished there are the only unimportant contingency of bankruptcy of the firm the amount at development, short-term commercial bonds which can be immediately transformed into cash are handled as cash equivalents and can be converted into cash instantly without noteworthy variations in the value.
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