Differences between cash and credit transactions
| SN | Criteria | Cash Transaction | Credit Transaction |
|---|---|---|---|
| 1 | Definition | This is when cash is received immediately after the transaction occurs. | Here, cash is deferred to a later date. |
| 2 | Subsidiary book | The cash book is its subsidiary book. And this also serves as a ledger. | Day books and journals are the books of original entries for credit transactions. |
| 3 | Source document | It uses receipt as its source document | The invoice is the primary source document. |
| 4 | Accounting concept | Follows cash basis of accounting as well as the accrual basis of accounting to the extent at which cash is paid or received at the time of the transaction | Complies with the accrual concept of accounting only. |
| 5 | Example | An example is when a company bought office furniture and the payment was made immediately | This might occur when a customer buys goods, and an agreement was made for payment to be delayed. |
Key Explanations of cash and credit transactions
The difference between cash transactions and credit transactions is the timing. That means when the event occurs, one party makes a payment in cash while the other receives cash.
Transactions made by cash are not necessarily physical cash. It can be via bank transfer, cheque, ATM, QR code, or any other electronic medium. The main point is that an immediate payment was made and there was no plan to set payment on another date.
The timing difference between the payments helps differentiate cash and credit transactions– Jeremiah
We can explain these via example. Let's say that Mr Micheal sold goods to Mr Toba and the price of the goods is N50,000. If Mr Toba paid for it as he is collecting the goods, then it is a cash transaction. On the other hand, if Mr Micheal agrees that Mr Toba can make payment for the goods in the next three days, it becomes a credit transaction. At the end of the three days when Mr Toba makes payment, it reverts to a cash transaction.
Cash transactions are recorded in the cash book which serves as a subsidiary book and ledger. But credit transactions do pass by a day book or journals before they are posted to the ledger. Receipt is the only source document for cash transactions. Credit transactions can require various source documents but the primary one is the invoice.
More so, cash and credit transactions comply with the cash basis and accrual basis of accounting, respectively. In more detail, cash transactions also applied to the accrual basis concept. The accrual basis concept claims that transactions are recorded when they occur rather than when cash is received or paid.
Finally, credit transactions give rise to debtors and creditors, which are also referred to as trade receivables and trade payables, respectively. This is not so with cash transactions. When goods are sold on credit, trade receivables arise. However, the purchase of goods on credit from suppliers leads to trade payables.
