We observe several transactions in our daily life when we pay for goods or services in a transaction. Whether it may be a small-scale or big-scale business, there is a need for the transaction.
We have two kinds of transactions, cash transactions and credit transactions. These two transaction kinds differ in the time gap between purchasing the goods and payment for the goods.
Cash transactions are settled during purchasing the product, and we need to pay for the product and take the goods. Both processes are done simultaneously. But credit transactions have the flexibility to take the goods and pay for the goods later.
Key Takeaways
- Cash transactions involve immediate payment and receipt of goods or services, while credit transactions entail deferred payment.
- Cash transactions provide instant liquidity to the seller, whereas credit transactions may involve a risk of non-payment.
- Credit transactions allow buyers to purchase goods or services without immediate payment, potentially promoting higher business sales.
Cash Transaction vs Credit Transaction
Cash transactions involve the exchange of physical currency or coins, where the buyer pays immediately with physical currency or coins, and the seller receives the payment in the same form. Credit transactions involve the use of credit or debit cards, online payment gateways, or bank transfers.
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 receipts for the goods or assets 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 year depending on the cost and transaction flexibility. We need to pay them back within the issued time.
Comparison Table
| Parameters of Comparison | Cash Transaction | Credit Transaction |
|---|---|---|
| Definition | A 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 period | Immediate | Depends on the goods and consumer. |
| Suitable for businesses | Small scale business | Large scale business |
| Basis of accounting | Both, cash basis and mercantile basis. | Accrual basis only. |
| Number of entries per transaction | Fewer | Multiple |
| Cash flow | The immediate impact on cash flow | No effect until settlement of payment. |
What is Cash Transaction?
A cash transaction is defined as a transaction in which the goods purchased and the worth of goods are exchanged immediately.
In detail, The consumer who purchases a specific good 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 received by the seller immediately.
So there will be an immediate effect on the bank statement of both persons, i.e. there will be a debit of cash in the consumer’s balance sheet, 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 made. 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 fruit. You have cash or a 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 immediately to the seller’s account. This is a cash transaction.
There will be an immediate exchange. These kinds of transactions are 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 instalments.
The seller and consumer agreement sets this transaction’s payment date or instalment time. The 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 made later after a period, or it is divided into instalments 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 instalments) 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 Transactions and Credit Transactions
- A cash transaction is a transaction where there is an immediate cash settlement of the goods purchased. On the contrary, a Credit transaction is a transaction in which payment is settled after a period.
- In a cash transaction, there will be an immediate effect on the seller’s and consumer’s balance sheet as well. But in credit transactions, there won’t be any immediate impact on the balance sheet of the seller and consumer since the payment is made later.
- There will be no considerable time gap between the settlement and purchase in a cash transaction. But a time gap exists between the settlement for the purchased goods in a credit transaction. Credit transactions are not settled simultaneously.
- Cash transaction type is observed in small-scale businesses like retail markets. Credit transactions are observed in large-scale businesses like automobile companies.
- It is a cash transaction when we buy an apple in the grocery store and pay for it immediately. And if we buy a smartphone in some mobile showroom and pay for it later, it is a credit transaction.
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=891791
- https://link.springer.com/article/10.1007/BF01211444
Last Updated : 21 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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