Accounting Fundamentals Certification (AFC) Practice Test

Cash is classified as an asset in accounting because it represents a resource that a company owns and can use to generate future economic benefits. Assets are resources that have value and can be used to acquire goods or services, pay off debts, or invest in future opportunities. In the context of the accounting equation, assets are a crucial component since they reflect what the company possesses. Recognizing cash as an asset is fundamental to understanding a company's liquidity and financial health. It is one of the most liquid assets, meaning it can be readily used to meet immediate financial obligations, unlike liabilities, which represent debts owed by the company. Revenue and expenses, on the other hand, relate to the income earned and costs incurred, respectively, rather than representing what the company owns. This makes cash a vital part of the balance sheet, situated alongside other asset accounts such as accounts receivable and inventory.