Cash and Cash Equivalents: A Simple Guide with Examples

Cash and cash equivalents are a company’s most liquid assets. Cash means currency and bank balances available on demand. Cash equivalents are short-term, highly liquid investments, such as Treasury bills, that convert to known amounts of cash with insignificant interest-rate risk. Generally, they must have a maturity of three months or less when acquired.

Receivables, prepaid expenses, and longer-term investments belong in other categories. Getting the classification right helps readers judge liquidity, which is a company’s ability to meet near-term payments. This guide is for Intermediate Accounting students and CPA candidates, and it uses original hypothetical examples.

What are cash and cash equivalents?

Cash is money available for ordinary payments. It includes currency, coins, demand deposits, and valid checks received from customers. A demand deposit is a bank balance, such as a checking account, that you can withdraw at any time without notice or penalty. Petty cash also belongs in cash: putting a small amount in a cash box does not change the asset’s nature.

A cash equivalent is a short-term, highly liquid investment that works almost like cash. The ASC Master Glossary sets two tests. The investment must be readily convertible to a known amount of cash, and it must be so near maturity that changes in interest rates pose only an insignificant risk to its value.

Meeting both tests doesn’t automatically make an investment a cash equivalent. Each company sets an accounting policy for which qualifying investments it treats as cash equivalents, and it discloses that policy (ASC 230-10-50-1). Changing the policy is a change in accounting principle.

These rules come from U.S. generally accepted accounting principles (GAAP). The Financial Accounting Standards Board (FASB) sets them in its Accounting Standards Codification (ASC), the official source of U.S. GAAP. ASC Topic 230, Statement of Cash Flows, uses the term, and the ASC Master Glossary defines it. FASB has reproduced the cash-equivalent definition in its glossary materials. Cash equivalents are a narrow category, so not every asset that sells quickly qualifies.

What is the three-month rule for cash equivalents?

For investments with a stated maturity, generally use three months or less from the company’s acquisition date to maturity. “Original maturity” means original maturity to the investor holding the investment, not necessarily the instrument’s total life from its issue date.

Hypothetical comparison: Cedar Studio buys a Treasury security on November 1 that matures on January 1. Its acquisition-to-maturity period is two months, so it can qualify if the other conditions and Cedar’s policy are satisfied. A different security purchased with a nine-month term does not become a cash equivalent merely because only two months remain at year-end.

Exactly three months is within the usual threshold. A six-month certificate of deposit acquired at issuance ordinarily belongs in short-term investments, even if management expects to use the proceeds soon. Not every current asset is a cash equivalent. The current asset category is much wider.

A quick three-question test

Not sure about an investment? Ask these in order:

1. Is it a short-term, highly liquid investment that readily converts to a known amount of cash and is so near maturity that interest-rate changes pose only an insignificant risk to its value? If not, it isn’t a cash equivalent.
2. If it has a stated maturity, was that maturity three months or less when your company acquired it? If not, it generally isn’t a cash equivalent, even if it matures soon.
3. Does your company’s policy treat this kind of investment as a cash equivalent? If yes, include it. If not, report it as an investment.

CPA Exam tip: FASB’s classic example is worth memorizing. A three-month Treasury bill and a three-year Treasury note purchased three months from maturity both qualify. A Treasury note purchased three years ago doesn’t become a cash equivalent when three months remain.

What is included in cash and cash equivalents?

IOU means an acknowledgment that money is owed. NSF means not sufficient funds: the bank did not honor the customer’s check. A returned NSF check therefore restores the customer receivable rather than remaining in cash.

Money market deposit accounts and money market funds are different products. An available bank deposit may be cash; a qualifying money market fund may be a cash equivalent. Read the terms instead of classifying an item from its name alone. Similarly, certificates of deposit do not all qualify automatically.

FASB’s own examples of common cash equivalents are Treasury bills, commercial paper, money market funds, and federal funds sold (for banks). Commercial paper means short-term unsecured notes issued by companies. A Treasury bill is short-term debt issued by the U.S. government.

How do you calculate cash and cash equivalents?

Here’s the basic formula:

Cash and cash equivalents = cash on hand + demand deposits + qualifying short-term investments

Hypothetical example: Oakbridge Design has $19,200 in unrestricted checking, $400 of actual petty cash, $1,100 of valid customer checks, and a $7,500 qualifying two-month Treasury bill. It also holds a $900 postdated check and a $4,000 six-month deposit purchased at issuance.

The $900 is a receivable. The $4,000 is a short-term investment. Both remain assets, but neither enters the $28,200 total. Notice that the example supplies actual cash in the petty cash box; an authorized fund amount could include vouchers that are no longer cash.

Before reporting the total, also identify any restricted cash and compensating balances. Evaluate negative bank balances using the separate rules for bank overdraft accounting. Do not hide either issue inside a combined total. Also use reconciled balances here, not the raw bank statement figure. Our bank reconciliation guide shows how.

Where do cash and cash equivalents appear in the financial statements?

On the balance sheet, cash and cash equivalents usually come first under current assets because they’re the most liquid items a company owns. Many companies combine them on one line. In the Oakbridge example, that line would read: Cash and cash equivalents, $28,200. Analysts also use this total in the cash ratio: (cash + cash equivalents) ÷ current liabilities.

On the statement of cash flows, the total can be larger. Under ASC 230-10-45-4, the statement explains the change in cash, cash equivalents, and restricted cash together. Say Oakbridge also holds $2,000 of restricted cash on a separate balance sheet line. Its cash and cash equivalents line still shows $28,200, but the ending total on its statement of cash flows is $30,200 ($28,200 + $2,000). A company that spreads these amounts across several balance sheet lines also shows how they tie together (ASC 230-10-50-8).

Moving money into a cash equivalent generally isn’t a reported cash flow. If Oakbridge pays $7,500 from checking for its Treasury bill, the money just moves within the same total (ASC 230-10-45-5).

In the notes, a company explains its policy. Here’s a sample note for our hypothetical company: “Oakbridge Design treats all highly liquid investments with an original maturity of three months or less when acquired as cash equivalents.”

Did FASB change the cash equivalents rules in 2026?

Not yet. On August 18, 2026, FASB issued a proposed Accounting Standards Update, which is a draft change to U.S. GAAP. Comments are due November 19, 2026, and FASB hasn’t set an effective date.

The proposal keeps the current definition of cash equivalents. It would do two things:

• Add examples for stablecoins, which are digital assets designed to hold a steady value against something like the U.S. dollar. To qualify, a stablecoin would need a direct, on-demand contractual right to redeem from the issuer for a known amount of cash. The issuer would also need segregated reserves of at least one-to-one in short-term, highly liquid assets.
• Require all entities with cash equivalents to disclose their significant components and amounts each year, such as Treasury bills, commercial paper, stablecoins, and money market funds.

Studying for an exam? Keep using the current definition. This is still a proposal.

Common classification mistakes

Why does this matter for the CPA Exam? Cash and cash equivalents is a named topic in the FAR section, under Area II, Select Balance Sheet Accounts, which makes up 30 to 40 percent of the section in the 2026 blueprint. Watch for these traps.

Using the reporting date for the maturity test. Start with acquisition. The passage of time does not convert a longer-term investment into a cash equivalent.

Equating liquidity with cash. A stock may sell quickly but its sale proceeds fluctuate. A receivable may be collected soon but still represents a claim against a customer.

Counting every check as cash. Check dates and collectibility matter. Postdated and dishonored checks require different treatment from valid checks payable now.

Ignoring availability. A positive bank balance may be unavailable for general payments. The balance sheet’s current and noncurrent categories help communicate that distinction.

Forgetting company policy. An investment can meet both tests and still be reported as an investment, because each company sets its own policy.

Three practice questions with explanations

1. Which maturity date matters?

A company acquires a debt security on March 1. It matures on May 1, although the issuer originally issued it two years earlier. Can it qualify as a cash equivalent?

2. Find the reporting error

A student includes a $650 returned NSF check in cash because the customer originally delivered a check. What should change?

3. Calculate the total

A business has $8,300 in checking, $200 in currency, a $2,000 qualifying cash equivalent, and a $500 employee IOU. What is cash and cash equivalents?

Preparing for FAR? Keep practicing in the CPA test bank.

Frequently asked questions

What is the difference between cash and cash equivalents?

Cash is money itself: currency, coins, and bank balances you can use right away. A cash equivalent is a short-term investment that still has to mature or be converted into cash. Companies usually report both on one balance sheet line.

Are certificates of deposit cash equivalents?

Sometimes. A certificate of deposit (CD) acquired with a maturity of three months or less can qualify if it meets the other tests and the company’s policy. A six-month CD bought at issuance ordinarily goes in short-term investments.

Is a money market fund a cash equivalent?

It can be. The FASB glossary lists money market funds as a common example, but check the fund’s terms and the company’s policy. A money market deposit account at a bank is a different product and may be cash.

Are bank overdrafts included in cash and cash equivalents?

Not under U.S. GAAP. Overdrafts are generally reported as liabilities. IFRS Accounting Standards can include an overdraft in the cash flow statement total when it is repayable on demand and an integral part of cash management.

Are stablecoins cash equivalents?

It depends. Under FASB’s August 2026 proposal, a stablecoin would need a direct, on-demand contractual right to redeem for a known amount of cash, plus segregated one-to-one reserves in short-term, highly liquid assets. The proposal is not final.

Is petty cash a cash equivalent?

No. Actual coins and currency in a petty cash fund are cash. Cash equivalents are qualifying investments.

Are all short-term investments cash equivalents?

No. Short-term investments can have longer maturities or greater value risk than permitted for cash equivalents. “Current” and “cash equivalent” answer different classification questions.

Why combine cash and cash equivalents on the balance sheet?

The combined caption groups money and closely related qualifying investments. The accompanying accounting policy explains which investments the company includes. Restrictions and other material distinctions still require appropriate presentation or disclosure.

By Professor Mansour Farhat, DBA, CPA, CIA. Professor Farhat is a veteran accounting educator and the founder of Farhat Lectures and its YouTube channel. He holds a Doctor of Business Administration from Temple University and a Master of Accountancy from Bloomsburg University. The examples on this page are original teaching examples. Last reviewed: November 2026.

Sources: FASB Accounting Standards Codification, Master Glossary and ASC 230-10; FASB ASU 2014-06; FASB proposed Accounting Standards Update on cash equivalents, August 18, 2026, as reported by the Journal of Accountancy; AICPA Uniform CPA Examination Blueprints, effective January 1, 2026.