The easiest asset to change into other assets or use to settle liabilities is cash, which is also the most liquid asset. Cash is either categorized as an asset or a liability in accounting, depending on the circumstances.
Cash is typically seen as an asset because it reflects the current possessions of a corporation that may be used to produce income. It appears in the asset portion of a company’s balance sheet. Coins, paper money, and deposits into checking and savings accounts are all examples of cash.
When cash is received or paid, the cash basis accounting technique records revenue and expenses for tax purposes. This means that even though a service was actually supplied in January, if a corporation receives cash for a service provided in December, the revenue is recorded in December. Similar to this, even if a corporation pays for a service in January but receives it in December, the expense is still recorded in December.
The cash basis accounting technique does not account for fixed assets. The accrual basis accounting method is used to report fixed assets, such as buildings and equipment, in the asset section on a company’s balance sheet.
It is possible to switch from cash to accrual accounting, but it necessitates a thorough overhaul of a company’s accounting practices. Regardless of when cash is received or paid, accrual accounting records revenue and expenses as they are incurred. In comparison to the cash basis method, this can give a more realistic picture of a company’s financial health, but it can also be more complicated and time-consuming.
Last but not least, cash is not directly recorded on the income statement. Instead, when cash is collected or paid, it is noted as income or expenses. This means that even though a product was sold in January, if a corporation receives payment for a product sold in December, the revenue is recorded in December on the income statement. Similar to this, even if a corporation purchases office supplies in December and uses them in January, the expense is still recorded in December on the income statement.
The classification of cash is dependent on the situation, however it is generally thought of as an asset. When cash is received or paid, income and costs are recorded using the cash basis accounting method, which is a tax basis. Under this system, fixed assets are not recognized. Accounting practices must undergo considerable modifications while moving from cash to accrual accounting. Last but not least, when cash is received or paid, it is recorded as revenue or expense rather than directly on the income statement.