Cash Transactions Vs Credit Transactions

Financial Accounting: Cash Transactions Vs Credit Transactions
What is Cash Transaction?
What is Credit Transaction?

Difference between cash transaction and credit transaction
Every business undertakes numerous transactions during the course of its operations. Transactions are those business events that have an influence on the finances of the business and are thus recorded in its books of accounts.

This video looks at meaning of and differences between two different types of transactions based on how they are settled – cash transaction and credit transaction.
Definitions and meanings
Cash transaction:
A cash transaction is a business transaction that includes exchange of cash at the time of occurrence of the transaction itself. Cash in this case implies settlement – the settlement may be in actual cash, by credit or debit cards, check payment or bank transfer but would still qualify as a cash transaction if they are settled at the time of occurrence of the transaction itself.
Any business transaction can succeed as a cash transaction if it involves immediate settlement in cash. For example, over the counter sale of goods involves exchange of goods for cash at the time of the sale transaction itself thus succeeds as a cash transaction. This transaction would qualify as cash transaction irrespective of whether it is paid for by cash or by a debit or credit card.
Cash transactions are recorded in books of accounts in both cash basis and accrual basis of accounting. These transactions have an instant effect on the cash flow of the business.
Credit transaction:
A credit transaction is a business transaction which although has monetary impact does not involve exchange of cash at the time of occurrence of the transaction, but is settled in cash at a subsequent date.
Credit transactions result in formation of asset (receivable) or liability (payable) in the books of accounts. This asset or liability is extinguished from the books at the time of settlement.
For example, a manufacturer sells his goods to a wholesaler who does not pay for them directly but is allowed a credit period of 60 days for making payment. This is a credit sale of goods that does not involve immediate cash exchange however it results in recognition of income and creation of a debtor, thus it still has monetary impact and qualifies as a credit transaction.
Credit transactions are only recorded in books of accounts upheld on accrual basis. These are recorded in books maintained on cash basis only at the time of settlement.


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