Rules for determining a cash or credit transaction

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Often students get confused in deciding about the nature of a transaction i.e. cash or credit. These points can guide those students.

Signs of Cash Transaction

(i) All transactions in which the word ‘Paid’ is mentioned are termed as “Cash Transactions “e.g. Rent paid, Salaries paid etc.

(ii) All transactions in which the words “Cash or Cheque” are used are termed as “Cash Transactions”. e.g. cash received $1,000 or cheque received $10,000.

(iii) If cash and person’s name both are mentioned then this will be termed as
Cash Transaction” e.g. goods purchased from Amir for cash Rs.3,000.

(iv) Sometimes nothing mentioned in a transaction but, still, it is a “Cash Transaction” e.g. goods sold for $4,000.

Signs of Credit Transaction

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

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

Example

State whether the following transactions are cash or credit:

(a). Mr. David Started a business with cash $200,000.
(b). He purchased goods for $1,000.
(c). He purchased goods from John for $2,000.
(d). He purchased goods from Harry for cash $5,000.
(e). He sold goods on credit to Micheal for $2,000.
(f).  He sold goods for $5,000.
(g). He sold goods to Warn for cash $2,500.
(h). He paid office Rent $3,000.
(i).  Received commission $500.
(j).  Paid Insurance $2,000

Solution

(a). It is a cash transaction.
(b). It is a credit transaction.
(c). It is a credit transaction.
(d). It is a cash transaction.
(e). It is a cash transaction.
(f).  It is a cash transaction.
(g). It is a cash transaction.
(h). It is a cash transaction.
(i).  It is a cash transaction.
(j).  It is a cash transaction.

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