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Differentiate between cash transaction and credit transaction
During the course operations, every business will have several transactions, which have an impact on business finances and are recorded in books.
Cash transactions are those transactions, which are settled at the time of occurrence of transaction. Sometimes, they are settled in cash at the time of occurrence or sometimes they are paid with debit card, credit card, through bank transfer or cheque payment at the time of occurrence.
In simple words, a business transaction is said to be a cash transaction, when it is settled immediately at time of occurrence. These transactions show an immediate effect on business cash flows. These are recorded in both cash and accrual basis of accounting in books of accounts.
Example − Counter sale of goods. Transactions are called cash transactions irrespective of their method of payment (Cash, card, cheque or through bank transfer), when they settle at the time of sale.
Credit transactions have monetary impact but, not immediately at the time of occurrence.
It means that they are settled at a subsequent date.
In books of accounts, these transactions create asset receivables or are liability payable, which will extinguish at the time of settlement. These are recorded on accrual basis at the time of occurrence and are recorded in cash basis at the time of settlement.
Example − Wholesalers get goods from manufacturers with some credit period for payment.
The major differences between a cash transaction and a credit transaction are as follows −
|Sr.No||Cash transaction||Credit transaction|
|1||Settled in cash.||Settled in cash at a future date.|
|2||Immediate settlement.||Settlement at subsequent date (to transaction date).|
|3||Applicable to both cash and mercantile basis of accounting.||Applicable only to accrual basis.|
|4||Single or fewer entries per transaction.||Multiple entries per transaction.|
|5||There is an impact on cash flow.||Cash flow has no impact.|
|6||Suitable for small or retail business.||In the balance sheet, it has impact through asset creation of liability|
|7||In the balance sheet, it has an impact through cash/bank accounts.||Suitable for larger business.|
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