Why learn about cash and cash equivalents?

As we start to talk about the specifics of accounting for each line item on the trial balance, starting with cash, we also need to explore how those items, especially assets, are safeguarded. Since cash, which includes checking accounts, savings accounts, and other assets that are used like cash (including debit and credit cards), is one of the easiest assets to get “misplaced” and is one of the most important assets for the business, this lesson is a good place to pause and start the discussion around internal controls—both the structure of internal controls and the activities.

In general terms, the purpose of internal control is to ensure the efficient operations of a business, thus enabling the business to effectively reach its goals. An effective internal control structure includes a company’s plan of organization and all the procedures and actions it takes to:

• Protect its assets against theft and waste.
• Ensure compliance with company policies and federal law.
• Evaluate the performance of all personnel to promote efficient operations.
• Ensure accurate and reliable operating data and accounting reports.

The internal control structure includes things like management’s attitude toward safeguarding assets, the processes in place for monitoring (such as an internal review) and reporting, and the way the business is set up to allow for cross-checking and assigning responsibility. Part of your job as an accountant is to evaluate, establish, and monitor internal controls that do more than just maintain the accuracy and integrity of the accounting records.

In this section, we’ll take a look at internal controls in general, and then specifically at what financial statements call “cash and cash equivalents.” While you are learning to record cash receipts and disbursements, you’ll also learn to apply internal control concepts to those transactions and to the cash balance as well. Finally, you’ll identify cash and cash equivalents on the financial statements and you’ll see why they are usually listed first on a company’s trial balance, general ledger, and balance sheet.