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What Is a Cash Transaction?

Financial transactions with cash are referred to as cash transactions.
A cash transaction is when a buyer pays for goods or services with cash at the time of purchase.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 August 2014
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Cash transactions are any type of financial transaction where cash is used to settle a transaction on the same date that it takes place. Transactions of this type occur in retail settings as well as with the acquisition of investments. This method is different from a credit transaction, where the process of payment may be implemented on the actual date that the transaction takes place, but does not complete or settle until some specific point in the future.

In investment settings, a cash transaction makes it possible to settle the purchase or sale of an asset on the same date that the transaction is initiated. With other forms of payment, the transaction may not be settled for anywhere from a few days to several months. A true cash transaction requires that all matters related to the transaction, including payment and delivery, are completed on the trade date, and not postponed to some future settlement date. For example, with a forward contract, the assets purchased are delivered at some future point, at which time the investor pays the agreed upon price. With a cash transaction, the purchased asset is delivered immediately, payment is rendered, and both buyer and seller consider the transaction completed.

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One of the benefits of a cash transaction is that neither the buyer nor the seller has to devote time and energy to completing the sale at some future date. The transaction is settled in full on the day it is initiated, allowing both parties to move on to other lucrative transactions. A buyer is free to make use of the acquired asset in any way he or she desires, with no need to settle any outstanding obligation to the seller. For the seller, a cash transaction means that there are no worries of a default on the business deal, and he or she is free to use the proceeds from the sale in any manner desired.

While the cash transaction is simple and straightforward, it is not necessarily the most effective investment strategy in all situations. Forward contracts can be very lucrative investments, since they allow the buyer the opportunity to purchase securities at a rate that may be sufficiently lower than the market value that prevails on the agreed upon settlement date. Assuming that the investor had accurately projected the upward movement of the security, the credit purchase may be lower than the cost of purchasing the shares and settling the debt obligation on the date that the deal was initiated.

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Discuss this Article

seag47
Post 4

@cloudel – It's always good to carry a credit card with you when traveling, even if you do have the cash to pay for everything. One reason is that hotels require you to present either a credit or debit card when you check in, so that if you damage the room in some way or leave without paying, they can charge you.

Of course, you can always pay with cash as you check out of the hotel. This is usually what I do. The clerk asks me if I want to keep the charge on my card or if I want to pay cash, and I fork over the cash, because I like to be done with it.

cloudel
Post 3

I generally use cash to pay for things under $50 and my credit card to pay for anything more than that. It sure is nice to have the transaction completed entirely when I use cash, but sometimes, I simply don't have enough to pay for more expensive things.

This past year, I paid for my hotel during my vacation with a credit card. The bill wound up being over $700, and I did not have that cash.

Since I used my credit card, I had a couple of months to pay it off before interest charges started to accrue. I used cash for everything else on my vacation, like food and souvenirs, but I really needed the extra time the credit card gave me to pay off the hotel bill.

wavy58
Post 2

@shell4life – I can see how that would be easier. I use my debit card for most transactions, and it does get frustrating keeping up with all the receipts.

However, I never know how much cash I am going to need, and I find it easier to use my debit card because of this. That way, I don't take any more money from my account than I need.

I have several of my bills set up for automatic payment, so if I don't have enough money in my account to cover them, I am in trouble. That is one reason why I prefer to leave the cash in the account and use the card to get exactly what I need.

shell4life
Post 1

I like cash transactions because I don't have to deal with receipts and balancing my checkbook. When I use a debit or credit card, I always have to keep up with the receipt and write the amount in my check register. Usually, the transaction doesn't go through for several days, and in the meantime, the amount shown to be in my account isn't correct.

With cash transactions, the only receipt I ever have to deal with is the one at my bank from the ATM. Once I record in my check register that I deducted a certain amount of cash from my account, that is the only thing I have to keep up with. I could spend that cash at ten different places and throw away the receipts.

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