Changes in the Cash Account

The way in which the 'cash account' is used in published accounts is to some extent counter-intuitive. To help you understand it we will use as an example a fictitious company that you will be familiar with if you have read any of our other free eBooks in the Finance Skills area.

The following is a statement showing the balance of the cash account for Gary's Garden Furniture business in the first two months of trading.

From this table you can see that for a change in:

Assets (other than cash) - the change in the cash account is in the opposite direction.
Liabilities and owner's equity - the change in the cash account is in the same direction.

The following table provided an explanation for each of the above items and reflects the change that occurs in the column of each key financial area.

This can be summarized as follows:
• When owner's equity increases, the cash account increases
• When an asset (other than cash) increases, the cash account decreases
• When a liability increases, the cash account increases

Conversely:
• When owner's equity decreases, the cash account decreases.
• When an asset (other than cash) decreases, the cash account increases.
• When a liability decreases, the cash account decreases.

You may also be interested in:
Cash Flow Analysis Definition | Managing Working Capital | Cash Flow | Direct Format Cash Flow Statement | Indirect Format Cash Flow Statement | Cash Flow from Operations | Cash Flow from Investments | Cash Flow from Financing.

Key Points The way in which the 'cash account' is used in published accounts is to some extent counter-intuitive. When owner's equity increases, the cash account increases. When an asset (other than cash) increases, the cash account decreases. When a liability increases, the cash account increases.

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