Theory

Key Terms & Definitions

Cash Inflow — All cash received by the business, such as customer payments, refunds, or interest income.

Cash Outflow — All cash paid out, including salaries, rent, supplier payments, and loan repayments.

Liquidity — A business’s ability to meet short-term obligations using its available cash.

Cash Book — A daily record of all cash-related transactions—both cash and bank—showing opening and closing balances and providing real-time insight into liquidity.

Petty Cash — A small fund kept for minor, immediate expenses, tracked within the cash book.

Cash Flow Statement — A financial report summarizing how cash moves in and out of the business during a specific period.

Operating Activities — Cash generated or spent in day-to-day operations (e.g., customer receipts, supplier payments).

Investing Activities — Cash related to the purchase or sale of long-term assets (e.g., equipment, property).

Financing Activities — Cash flows involving loans, equity, or dividends, such as borrowing funds or repaying debt.

Bank Reconciliation — A process comparing internal cash records with the bank statement to identify timing differences, errors, or missing entries.