Transactions are the building blocks of our accounts. Any transactions that occur within our business should be present in our accounting records.
There are many different types of transactions to keep track of such as sales, purchases, and even more. A regular point of confusion that we come across when we talk to small businesses about their accounts is the difference between cash and credit transactions. So, what is the difference?
The only difference between cash and credit transactions is the timing of the payment. A cash transaction is a transaction where payment is settled immediately. On the other hand, payment for a credit transaction is settled at a later date.
Try not to think about cash and credit transactions in terms of how they were paid, but rather, when they were paid. For example, you may buy some groceries at your local shop and pay for them in cash there and then, that’s a cash transaction. However, what if you paid by card rather than cash? That can also be classified as a cash transaction because you paid immediately.
On the other hand, credit transactions are paid at a later date than when the exchange of goods or services took place and almost all of time an invoice for the transaction is issued. The time period before payment can vary depending on the types of businesses or even the industry in which the transaction is taking place. Once again, when payment is finally settled for the invoice, it may be done with cash or card, or any other payment method but it is still a credit transaction.
Businesses will have a mixture of cash and credit transactions make up their accounting records. Some businesses may have the majority of their transactions be either one or the other and some will have a more even split. However, you would be hard pressed to find a business that didn’t have at least one cash or credit transaction occur during its lifetime.
Along with whether a transaction is classified as cash or credit another category is used to classify basic accounting transactions. We also need to know whether or not it is a sale, purchase or payment. This gives us a list of basic transactions:
1. Cash sale
2. Credit sale
3. Cash purchase
4. Credit purchase
5. Cash payment
6. Credit payment
Some of these, like cash and credit sales as well as credit purchases are more common that the others but depending on what type of transaction we have, we can find a home for it in our accounts. Do you want to find out more about where to record these different types of transactions in your accounting records? We have an exciting set of simple tutorials on the way to teach you bookkeeping basics just like this.
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