Cash account definition
/What is a Cash Account?
A cash account is a brokerage account that requires the account holder to render full payment in cash for any securities purchased by the settlement date. The account holder has not elected to, or has not been allowed to, make purchases of securities on margin. A purchase made on margin is one using funds borrowed from the brokerage.
Advantages of a Cash Account
An investor may choose to use a cash account in order to engage in conservative investing practices that do not involve the use of borrowed funds. Doing so limits the amount of securities that can be purchased, and therefore the upside potential of an investing strategy, but also limits the downside loss if the market prices of securities decline. Given this low-risk use of cash, many investors choose to follow up with lower-risk investment strategies for securities purchased through a cash account.
Cash Accounts for Trusts
If a cash account is set up as a trust account (that holds cash in trust for another party, such as a child), the investment strategy is usually especially conservative, since the person initiating and funding the trust may be most interested in maintaining the cash stored in the account to a greater extent than increasing the return on investment of those funds.
What is a Cash Account in Accounting?
In an accounting system, the cash account is a general ledger account in which all transactions are stored that relate to the receipt or use of cash. These transactions approximate the activity recorded in an organization’s checking account and savings account, showing cash receipts from various third parties, as well as cash payments to other parties. There may be several cash accounts, including the following:
Operating cash account. Used for the organization’s main checking account.
Petty cash account. Used for the organization’s various petty cash boxes.