Short answer: What a company has in cash and cash equivalents: the money it holds right now, plus short-term investments that can be turned back into money quickly. Under Indian accounting standards, cash means money on hand plus balances in demand deposits, while cash equivalents are short-term investments that can quickly become a known sum with only a negligible chance of changing in value.
Last reviewed: 5 November 2026
At a glance
| Item | Category | Why |
|---|---|---|
| Money held on hand | Cash | It is already money |
| Balances in demand deposits | Cash | Withdrawable on demand from the bank |
| Bank cheques, traveller’s cheques | Cash equivalent | Convertible into a known sum |
| Treasury bills, commercial paper, certificates of deposit | Cash equivalent | Short-term, with a negligible chance of value change |
| Equity shares | Generally excluded | Prices move, so the sum is not known in advance |
| Preference shares near redemption | Exception, can qualify | Close to a fixed repayment date |
What counts as cash?
Cash is the simplest category. It covers money held on hand, meaning notes and coins a business keeps in its premises or safe. It also covers balances in demand deposits, which are funds in a bank account that the account holder can withdraw whenever they ask.
Both forms are usable immediately. A balance in a current account is cash in the accounting sense even though it sits inside a bank.
What are cash equivalents?
Cash equivalents are a second layer. They are short-term investments that can be quickly turned into a known amount of money, and they carry only a negligible chance that their value will change before that conversion.
The test has two parts. The amount must be known, and the value must be very unlikely to move. Both conditions have to hold.
Common examples in India include bank cheques, traveller’s cheques, treasury bills (short-term debt issued by the government), commercial paper (short-term borrowing by companies) and certificates of deposit (fixed-term deposit certificates issued by banks).
Which items are usually left out?
Equity shares are generally excluded. A share’s price can rise or fall from one day to the next, so the sum it will fetch when sold is not known in advance.
The main exception is a preference share bought close to its redemption date, meaning the date the issuer agrees to buy it back. Near that date, the amount the holder will receive is close to a fixed figure, so the share can qualify.
The exception depends on timing. The same preference share bought years before redemption would not usually meet the test.
Why do cash and cash equivalents matter?
The main reason is liquidity, which means how easily a business can meet its bills and obligations as they fall due. A company with a larger cash and cash equivalents balance has a bigger liquidity cushion, so it can get through a difficult period without selling assets in a hurry.
Consider a hypothetical company, Alpha Traders, which is invented here for illustration. It holds ₹40 lakh in cash on hand and bank balances, plus ₹60 lakh in treasury bills. Its cash and cash equivalents total ₹40 lakh + ₹60 lakh = ₹100 lakh, or ₹1 crore.
If Alpha Traders has monthly payments of ₹20 lakh, that ₹1 crore covers five months of those payments, with no new income. A company with only ₹10 lakh in the same position would cover half a month. The numbers, not the labels, show the difference.
What are the catches?
The definition is strict, and it is easy to misread. A treasury bill qualifies because its value is expected to stay close to a known sum. A share does not qualify, even if it is easy to sell, because its price can change.
A large cash balance is also not automatically a good sign. A company that holds a great deal of cash may be cautious, or it may be unable to find uses for the money. Read the balance alongside the company’s other obligations and plans, not on its own.
For an individual, the same logic applies to the question of how quickly you can get at money and whether its amount is fixed. Each item’s category depends on those two tests, not on how safe it feels.
Frequently asked questions
Is money in a savings bank account a cash equivalent?
Money in a demand deposit, which is a bank balance you can withdraw on request, is classed as cash rather than a cash equivalent under Indian accounting standards. Cash equivalents are the separate short-term investments that can be turned into a known sum quickly.
Are equity shares counted as cash equivalents?
Equity shares are generally excluded, because their value can change and the amount they will fetch is not known in advance. The main exception is a preference share bought close to its redemption date.
Why does a larger cash balance matter for a company?
A larger cash and cash equivalents balance gives a company a liquidity cushion, so it can more easily get through difficult periods. It can meet its payments without having to sell other assets in a hurry.
Sources and last check
Facts in this article were checked against the sources below on 5 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- icicidirect.com (broker education)
- dhan.co (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.
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