Cash Explained

Manager Menu-Tabs > Cash Tabs

Bank Account and Cash Tabs record and process all cash received and paid.

Introduction to Cash

Cash is "King" and the lifeblood of a business.

What exactly is Cash ?

I know you're saying what a dumb question, but I was told in life there's no such thing as a dumb question. Cash is the balance of your bank accounts, savings accounts, money market accounts, certificates of deposit, currency on hand, undeposited receipts, and even your business' petty cash fund. Note that some forms of cash may have restrictions on how fast the funds are available for you to actually spend. Even your regular bank accounts may have what are called uncollected funds which means you may have to wait a few days before you can actually spend this money.

What is Cash Flow ?
A businesses' cash flow is simply the money (cash) flowing in and out of the business during a period of time. The major inflow of cash to a business results from the sales to customers and the immediate payment (cash sale) or the later payment (sales made on credit) resulting from these sales. Other cash inflows may result from investors contributing cash, bank or other loans made to the business, and the sale of equipment and other fixed assets. Major cash outflows are purchases of inventory, manufacturing costs for products, and payroll. Some other outflows are repayment of loans and interest and purchases of equipment and other fixed assets.

What's the difference between cash flow and profit ?

Profit is calculated by subtracting costs and expenses from sales and revenues. The recording of sales and their associated costs and expenses often do not coincide with when the resulting cash collected from sales and the cash spent for costs and expenses occurs. In a nutshell, we have a timing difference resulting in part from credit granted to our customers and credit from our suppliers granted to us. These timing differences often result in cash collections being delayed even though profits have been recorded on our books resulting in a short term cash shortage. In other words, we haven't yet converted all our profits into cash. So while profits are definitely important to the success of a business so is the management of cash. The lack of either of these can result in a business failure.

Cash Receipts Tab records and processes all cash receipts.

Where does most of a business's cash come from ? Well, in the beginning from the owners and loans and during operation from cash received from sales made to customers. When a business sells goods or services, it either receives cash for the sale at the time of the sale, or it accepts a promise from the customer to pay later that creates an accounts receivable entry.

A cash receipt payment on account is recorded by increasing the general ledger cash account (debited) and decreasing the general ledger accounts receivable account (credited). Also, the individual customer records maintained in Accounts Receivable are updated with the customer payment receipt.

A cash sale receipt is recorded by increasing the general ledger cash account (debited) and increasing a general ledger sale(s) account. In addition, the cost of goods sold general ledger account is increased (debited) and the the general ledger inventory account is decreased (credited). Also the detailed individual inventory records maintained for the products are updated.

Other cash receipts are recorded by increasing the general ledger cash account (debited) and increasing other miscellaneous accounts (credited).

Cash Payments Tab records and processes all cash payments.

A cash payment on a supplier's accounts payable account is recorded by decreasing the general ledger cash account (credited) and decreasing the general ledger accounts payable account (debited). Also, the individual supplier records maintained in Accounts Payable are updated with the supplier's payment.

A cash payment for the purchase of inventory products is recorded by decreasing the general ledger cash account (credited) and increasing the general ledger inventory account (debited). Also the detailed individual inventory records maintained for the products are updated.

Other cash payments are recorded by decreasing the general ledger bank account (credited) and increasing expense accounts and decreasing liabilty accounts (debited).

Note: The accounting software automaticall handles the processing and updating of these transactions. You supply the input and the software takes over from there.