Cash: Definition, Different Types, and History

What Is Cash?

Cash is legal tender—currency or coins—that can be used to exchange goods, debt, or services. Sometimes it also includes the value of assets that can be easily converted into cash immediately, as reported by a company.

Understanding Cash

Cash is also known as money, in physical form. Cash, in a corporate setting, usually includes bank accounts and marketable securities, such as government bonds and banker's acceptances.

Although cash typically refers to money in hand, the term can also be used to indicate money in banking accounts, checks, or any other form of currency that is easily accessible and can be quickly turned into physical cash.

Cash in its physical form is the simplest, most broadly accepted and reliable form of payment, which is why many businesses only accept cash. Checks can bounce and credit cards can be declined, but cash in hand requires no extra processing. However, it's become less common for people to carry cash with them, due to the increasing dependability and convenience of electronic banking and payment systems.

In finance and banking, cash indicates the company's current assets, or any assets that can be turned into cash within one year. A business's cash flow shows the net amount of cash a company has, after factoring in both incoming and outgoing cash and assets, and can be a good resource for potential investors. A company's cash flow statement shows all incoming cash, such as net income, and outgoing cash used to pay expenses such as equipment and investments.

Historical Forms of Cash

Cash has been used as long as goods and services have been traded, and its form depends on the culture in which it operates. Many civilizations over the last 4,000 years used coins struck from precious metals including copper, bronze (an alloy of copper and tin), silver, and gold, though other early civilizations used seashells or commodities of weight, including salt and sugar.

In modern times cash has consisted of coins, whose metallic value is negligible, or paper. This modern form of cash is fiat currency.

Paper money is a more recent form of cash, dating back to around the 18th century, and its value is set by its users' faith in the government backing the currency. This ability to determine price has extensive effects on an economy. It can affect inflation, or the rate at which prices rise for goods and services.

The more prices are inflated, the less purchasing power each paper note or coin holds. Inflation can cause all kinds of problems for an economy that doesn't yet understand the concept; in general, monetary authorities endeavor to keep inflation to a minimum and avoid deflation entirely. Deflation is the opposite of inflation—the lowering of prices—and has the potential to lead to economic depressions if severe.

Checks, debit cards, credit cards, online banking, and smartphone payment technology have decreased the need for people to carry cash in any form.

The Bottom Line

Cash is an informal term for physical manifestations of money, either in the form of paper notes or coins. In accounting, cash can also refer to assets that can be readily liquidated, such as bank accounts, commercial paper, and short-term bonds.