Different Types of Cash Accounts

By Maire Loughran from Intermediate Accounting For Dummies

The definition of cash goes beyond paper bills and coinage. Any sort of account that’s backed by cash is deemed a cash account. For example, when you go to the college bookstore and write a check to pay for your honking big intermediate accounting textbook (1,600 pages, yikes!), your check is the same as cash.

When you sign it, you attest to the fact that you have funds in your checking account, allowing this check to immediately clear — that is, those funds are withdrawable upon demand.

Depending on the size of the business, it may organize and manage its revenue and bill paying in one or more types of cash accounts. For example, a retail business probably has separate operating and merchant accounts (an account where credit card transactions deposit). A large service business may have separate operating and payroll accounts. Some companies have cash accounts for which they earn interest income.

Cash is a current asset and is your most liquid of all current assets. However, it’s also important that you understand the business purpose for different types of cash accounts. Here they are, along with a brief description:

Operating checking account: A business usually earmarks a particular checking account, which it calls the operating account, to handle business activities such as depositing revenue and paying bills.
Payroll checking account: Many midsize and large companies (some small ones, too!) have a checking account that they use only to pay employees. They figure up the total dollar amount of checks or transfers to pay employees and transfer that amount from the operating account to cover the payroll checks.
Merchant account: If a business allows customers to pay by credit card, it probably has a dedicated merchant account into which they deposit only funds from the merchant provider, or the company enabling the business ability to process customer credit cards. Normally, companies use withdrawals from this account to cover bill-paying withdrawals.
Petty cash account: Most companies have a cash box to pay for daily de minimis expenses. This account is also known as an imprest account because it always carries the same balance, which means that anytime the cash box is checked, it should have cash or receipts equaling the petty cash fund amount. So if the fund is $300, cash and receipts in the box have to equal $300.
Sweep account: A sweep account is a way for the company to automatically earn investment income. Each evening, any extra cash in the company's’ operating account is gathered up and transferred (swept) into investment accounts.

Money from many different companies is pooled into a bigger pot, thereby providing the advantage of a higher rate of return. Then as the company needs the money to clear checks and withdrawals, the money is swept back into the operating account.

The definition of cash includes coinage and currency in hand and on deposit in checking and savings accounts. It also includes near-cash assets, such as undeposited checks (checks received and in the process of being deposited) or deposits in transit (checks that have been deposited but have not yet shown up on the bank statement).