Difference Between Cash Transaction and Credit Transaction

We observe several transactions in our daily life. What we pay for goods or services in a transaction. Whether it may be a small scale or big scale business, there is the need for the transaction. We have two kinds of transactions, cash transactions, and credit transactions. These two transaction kinds differ with the time gap between purchasing the goods and payment for the goods.

Cash transactions are settled during purchasing the product, we need to pay for the product and take the goods. Both the processes are done simultaneously. But credit transactions have the flexibility to take the goods and pay for the goods later.

Cash Transaction vs Credit Transaction

The main difference between cash transaction and credit transaction is the period between payment for the goods purchased. If the payment for the purchased goods is done simultaneously after the purchase, then it is said to be a cash transaction. If there is a time gap between payment and the time of goods purchased, then it is said to be a credit transaction.

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In a cash transaction, there is an immediate payment for the goods purchased. There is no considerable time gap between the payment and the receipt of the purchased goods or property(asset). Cash transaction can be defined as, the kind of transaction in which the receipt for the goods and the payment of the goods(cash) are observed simultaneously.

In credit transactions, there is a time gap between the exchange of receipt for the goods or asset purchased and the cash payment. It is different from a cash transaction. A cash transaction is a transaction where you can take the goods instantly and pay later, let it be a day, month or a year depends on the cost and transaction flexibility. We need to pay them back within the issued time.

Comparison Table Between Cash Transaction and Credit Transaction

Parameters of ComparisonCash TransactionCredit Transaction
DefinitionA cash transaction is the kind of transaction in which the goods or assets and cash(payment) are exchanged simultaneously.In a credit transaction, cash(payment) for the goods purchased can be settled after a period, for instance, a month or a year.
Settlement periodImmediateDepends on the goods and consumer.
Suitable for businessesSmall scale businessLarge scale business
Basis of accountingBoth, cash basis and mercantile basis.Accrual basis only.
Number of entries per transactionFewerMultiple
Cash flowThe immediate impact on cash flowNo effect until settlement of payment.

What is Cash Transaction?

A cash transaction is defined as the transaction in which the goods purchased and the worth of goods are exchanged immediately. In detail, The consumer who purchases a specific goods or asset pays the cost of the goods to the seller during the time of purchase itself. Consumer pays the goods worth immediately through cash, debit card, or net banking.

In a cash transaction cash is paid to the seller or cash is received by the seller immediately. So there will be an immediate effect on the bank statement of both the persons, i.e. there will be a debit of cash in the balance sheet of the consumer and there will be credit in the balance sheet of the seller of the product. And the receipt is issued immediately as the payment is done. And there won’t be any relation between the consumer and seller in terms of payment.

For instance, when you go to a grocery store to get some fruits. You have cash, debit card in your wallet. You took fruits to check out. If the bill is handed to you, you can make the payment through cash or your debit card. If you pay through a debit card, the amount will be debited from your account and credited to the seller’s account immediately. This is a cash transaction. There will be an immediate exchange. These kinds of transactions are usually suitable for small-scale businesses.

What is Credit Transaction?

A credit transaction is a type of transaction in which cash payment for the purchased goods is not immediate. The consumer can pay later for the goods or assets purchased within a date or in installments. In this transaction, the seller and consumer agreement set the payment date or installment time. Seller stores all the details of the consumer and there will be a relationship for both of them until the payment is settled.

In this kind of transaction, there will be no immediate exchange or transfer of the amount. The cash payment is done later after a period or it is divided in to installments which are paid monthly. There will be no immediate impact on the balance sheet of the consumer and seller. The product is handed over to the consumer immediately. And the cash payment is settled subsequently.

For instance, you went to a car showroom to buy a car. After selecting the model of the car, you need to fix the payment. You will have options to settle at once through cash. And there will be EMI(every month installments) option available. In this, you need to pay the seller monthly and settle it within a period. This is a Credit transaction. Usually, these kinds of transactions are observed in large-scale businesses.

Main Differences Between Cash Transaction and Credit Transaction

  1. A cash transaction is a transaction where there is an immediate cash settlement of the goods purchased. On contrary, a Credit transaction is a transaction in which payment is settled after a period.
  2. In a cash transaction, there will be an immediate effect on the balance sheet of seller and consumer as well. But in credit transactions, there won’t be any immediate impact on the balance sheet of seller and consumer, since the payment is done later.
  3. There will be no considerable time gap between the settlement and purchase in a cash transaction. But there is a time gap between the settlement for the purchased goods in a credit transaction. Credit transactions are not settled simultaneously.
  4. Cash transaction type is usually observed in small-scale businesses like retail markets. Credit transactions are observed in large-scale businesses like automobile companies.
  5. When we buy an apple in the grocery store and pay for it immediately, it is a cash transaction. And if we buy a smartphone in some mobile showroom and pay for it later, it is a credit transaction.

Conclusion

Cash transactions and Credit transactions are kinds of transactions, which take place mostly around us apart from other kinds of transactions. Cash transaction is observed in retail stores where there’s an immediate settlement of payment. Credit transactions are observed in large-scale businesses like automobile and asset businesses.

Both the transactions differ with a time gap between the goods purchased and the cash payment of the goods purchased. As defined, a cash transaction is settled during the purchase of goods. Where there is an immediate effect on the balance sheet. While credit transaction has a time gap between the purchase and settlement for the purchase.

References

  1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=891791
  2. https://link.springer.com/article/10.1007/BF01211444

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