Rules for Determining a Cash or Credit Transaction

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 27, 2021

Deciding whether a transaction involves cash or credit can often confuse students. The following pointers will help to alleviate any confusion.

Features of Cash Transaction

(i) All transactions in which the word “paid” is mentioned are deemed cash transactions (e.g., rent paid, salaries paid, and so forth)

(ii) All transactions in which the words “cash or cheque” are used are deemed cash transactions (e.g., cash received for $1,000 or cheque received for $10,000)

(iii) If cash and a person’s name are mentioned then this will be deemed a cash transaction (e.g., goods purchased from Amir for cash $3,000)

(iv) Occasionally, nothing is mentioned in a transaction: in such cases, it is a cash transaction (e.g., goods sold for $4,000)

Features of Credit Transaction

(i) All transactions in which the words “on credit or account” are mentioned are deemed credit transactions (e.g., bought goods on credit/account for $3,000)

(ii) If a transaction involves the name of a person or firm without mentioning the word “cash,” it will be a credit transaction (e.g., sold goods to John for $5,000)

Examples

State whether the following transactions are cash or credit:

(a) Mr. David started a business with $200,000 cash

(b) He purchased goods for $1,000

(c) He purchased goods from John for $2,000

(d) He purchased goods from Harry for $5,000 cash

(e) He sold goods on credit to Michael for $2,000

(f) He sold goods for $5,000

(g) He sold goods to Rochelle for $2,500 cash

(h) He paid office rent of $3,000

(i) Received commission of $500

(j) Paid insurance cost of $2,000

Solutions

(a) Cash transaction

(b) Credit transaction

(c) Credit transaction

(d) Cash transaction

(e) Cash transaction

(f) Cash transaction

(g) Cash transaction

(h) Cash transaction

(i) Cash transaction

(j) Cash transaction

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