Back to: Accounting 101
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Today, we’ll look at the difference between cash transactions and credit transactions in accounting. Understanding this difference is key for any business.
Introduction:
In business, you can either pay for goods and services immediately (cash) or later (credit). Both have their pros and cons.
Body: Cash and Credit Transactions in Accounting
Cash Transactions:
With cash transactions, payment is made immediately. For example, when you buy a bottle of water from a street vendor, you pay right away.
Credit Transactions:
With credit, you agree to pay later. For example, if you purchase an item from a shop on credit, you’ll pay for it after some time.
Cash transactions involve the exchange of physical currency, such as notes and coins, for goods or services. When a customer pays cash for a purchase, the business receives immediate payment and does not have to worry about collecting the debt later. Cash transactions are typically recorded in the accounting records as a debit to the cash account and a credit to the sales account. For example, if a customer buys a product for ₦10,000 cash, the business would record a debit of ₦10,000 to the cash account and a credit of ₦10,000 to the sales account.
Credit transactions, on the other hand, involve the exchange of goods or services for a promise to pay later. When a customer buys on credit, the business records the transaction as a debit to the accounts receivable account and a credit to the sales account. The accounts receivable account represents the amount owed to the business by its customers. For example, if a customer buys a product on credit for ₦10,000, the business would record a debit of ₦10,000 to the accounts receivable account and a credit of ₦10,000 to the sales account. The business would then need to collect the debt from the customer at a later date.
Conclusion:
Understanding cash and credit transactions is essential for managing a business’s finances.
Evaluation:
Give an example of a credit transaction in a Nigerian business environment.
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