Cash Transaction

Article byJyotsna Suthar
Edited byprarthana Khot
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Cash Transaction ?

Cash transaction refers to the quick payment for any commodity or service through cash. This transaction allows an instant exchange of goods for cash, either in coins or notes. 

Cash Transaction

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These transactions are a vital source of exchange and payments. It helps in avoiding unnecessary purchases. Also, it is widely accepted everywhere. In addition, it serves as an instant revenue option for individuals. However, in the absence of cash, people might find it difficult to transact items.  

Key Takeaways

  • Cash transactions allow individuals to make cash payments to purchase any commodity. In addition, it allows them to make immediate settlements either in coins or currency notes.  
  • Examples of cash payments include coins, fiat notes, debit cards, and cryptocurrency. 
  • In the 20th century, economist Irving Fisher developed the cash transaction approach that states the direct relationship between the quantity of money and price levels. 
  • According to the Internal Revenue System, if an individual crosses the limit of $10,000, the federal government will charge a penalty to them.

Cash Transaction Explained 

Cash transactions might have different definitions, but their purpose remains the same. Firms refer to it as payment or receipt of any commodity for cash. In 1920, American economist Irving Fisher gave the cash transaction approach to determining the relationship between money and prices. In contrast, stock trading means immediate transactions (buy and sell) at the market (current) price. As a result, exchange markets accept it widely compared to all others. However, in the case of no cash, these transactions cannot occur. 

The history of cash and other transactions dates back to the first millennium BCE. During the 1000 BCE, people saw a general acceptance of coins in Europe and Asia. Likewise, in the 17th century (1694), England issued standard gold notes to raise money during the war. The importance of money transactions increased extensively during this era. In the Netherlands, people mainly used coins for financial transactions.

After the second world war, the market witnessed the highest cash usage. However, the cash transaction limit decreased drastically in the 21st century. The invention of credit cards, credit transfers, and online banking increased during this period. Ten million people opted for internet banking in 2001. By 2012, 46-82% of the population was already dealing with electronic payments. However, a certain percentage of the population still depends on cash to transact daily.

Cash payments depend on cash, coins, or debit cards. While shopping, people either use cash or cards to make payments. Also, businesses prepare a separate cash book and cash account to record possible cash payments and receipts. However, there are certain limits on transacting in cash. 

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Rules

According to the Federal Government, if an individual crosses the cash transaction limit of $10,000, the Internal Revenue Service (IRS) will impose a cash transaction charge. Cash consists of “coins and money from the United States or any other nation. It may also be a cashier’s check, bank draught, traveler’s check, or money order having a face value of $10,000 or less for certain transactions. Therefore, any cash over $10,000 must be reported, regardless of whether the receiver received it in one payment, two or more payments during 24 hours, one transaction within 12 months, or two transactions within 12 months.

Besides, if they transact two transactions of $5000 each within 12 hours, they still need to fill out the cash transaction report. Likewise, Form 8300 mentions the transaction amount, payer, and receiver. An individual must file the cash transaction report within 15 days to the IRS. However, if the second party has already used the amount within 15 days or transacted outside the United States, the person can skip Form 8300. 

Examples

Let us look at some examples of cash transactions to understand the concept better:

Example #1

Suppose Henry visits Incline Village, Nevada​​, in the United States. This village is popular for mountain treks and beautiful beaches around the town. Since Henry is a resident of Texas, he uses credit and debit cards for payments. However, when he went to the remote areas of the village, there were no ATM booths or swipe-up machines to make payments.

As a result, villagers suggested Henry make cash payments as they were workable and accepted everywhere. Therefore, he could enjoy his vacation and make cash payments (US dollars). 

However, if he had not carried cash, it would have been difficult for him to make payments. Also, not all retailers have credit card machines. In contrast, if he did not have a cash condition and there was a credit card machine, he could have easily made the payment. 

Example #2

According to the 2022 Global payments report, there is a decline in cash trades by 32.1%. The Middle East and Africa were the major ones to transact in cash, with 44%. And this number will reduce by 31% by 2025. Whereas in Latin America, 36% of people use cash; in 2025, the number will drop by 8%.

However, in Asia, only 16% of the population uses cash. The main reason is the adoption of UPI (Unified Payment Interface) in India. As a result, maximum citizens and retailers have switched to a barcode system to make payments instead of cash. 

Difference Between Cash Transaction And Credit Transaction 

Although people use cash and credit transactions to make payments, they differ slightly. While the former works purely on a cash basis, the latter uses a credit facility to make payments. For example, people use coins, notes, and debit cards to make cash payments. In contrast, the latter uses credit cards or bills of exchange.

The IRS issues cash transaction charges for payments of more than $10,000 for any individual or business. In comparison, for credit transactions, the limit depends on the credit card company or the creditor. However, both have specific pros and cons to consider. 

 Cash TransactionCredit Transaction
MeaningTransactions that deal only in cash.Transactions that use credit (loans) to make payments.
PurposeFor immediate payment of commodities.To purchase items today but pay later.
Settlement timeImmediateIn the future
Number of transactionsLimit of $10000Limited to the amount mentioned in the card.
Impact on businessAffects cash flowAffects credit score
Used byIndividuals and small retailersLarge businesses

Frequently Asked Questions (FAQs)

What is a quasi-cash transaction?

It includes purchasing lottery tickets and casino games using debit cards and converting the profit into cash. Besides that, it also involves purchasing traveler’s cheques, foreign currency, and money orders. 

Can cash transactions be traced?

Although it seems complicated, it is near to possible. The government can trace the serial number and locate the transactions. However, in an underground economy, it is impossible since the authorities have no access to the actual income figures. 

Do cash transactions get reported?

An individual needs to report these transactions of more than $10000 to the IRS by filling out Form 8300. This information helps the government regarding illegal activities like crime, money laundering, and tax evasion.  

What are the types of cash transactions?

Following are the types of these transactions processed by an individual:
– Withdrawal of cash
– Purchase of an item, commodity, or service
– Receiving money for a similar item 
– Bill payments

This article has been a guide to what is Cash Transaction. Here, we explain it with its rules and examples and compare it with credit transactions. You can learn more about it from the following articles –

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