Reviewed by Oct 05, 2020| Updated on
A cash transaction refers to a transaction which involves an immediate outflow of cash towards the purchase of any goods, services, or assets. Cash transaction can be consumer-oriented or business-oriented.
A cash transaction stands in contrast to other modes of payment, such as credit transactions in a business involving bills receivable. Similarly, a cash transaction is also different from credit card transactions.
The common definition of a cash transaction is an immediate payment for the goods or services bought. However, the term can have diverse meanings. For example, in the Indian stock market, a transaction of the purchase of sale in the delivery segment is cash transaction though the settlement happens on a T+2 basis.
Cash transactions are different from transactions which involve a delay in delivery of the goods or delay in payment. Such transactions include credit sale, forward contract, futures contract, and other margin transactions.
For example, in a futures contract, though the contract terms on price and quantity are agreed, the payment and delivery do not occur immediately.
An example of a cash transaction is you walking into a store, buying clothes, and paying using a debit card. A debit card payment is the same as an immediate payment of cash as the amount gets instantly debited from your bank account. However, credit card payments are not the same in effect for the purchaser.
In a credit card payment made by you, the amount is not debited from your bank account instantly. However, you are able to buy the product within your credit limit under the credit card. You need to make payment only after the generation of your credit card bill. Again, you enjoy a credit period until the last date available for payment.
From a business perspective, cash transactions above a threshold limit could face disallowance under the income tax law. A firm also needs to report all cash transactions beyond a threshold limit. However, from a consumer’s perspective, not all cash transactions are reportable.
In India, the income tax law and reporting authorities generally track down high-value cash transactions through the PAN (Permanent Account Number) of the paying party.