What Is a Cash Transaction? Defined, How They Work, and Example

What Is a Cash Transaction?

A cash transaction is a transaction where there is an immediate payment of cash for the purchase of an asset. It differs from other types of transactions that involve delayed delivery of the purchased item, or delayed payment for the item, such as forward contracts, futures contracts, credit transactions, and margin transactions. 

Understanding a Cash Transaction

A cash transaction can have many different definitions. Essentially, it is an immediate cash payment in exchange for the receipt of an item. Under some definitions, market stock transactions can be considered cash transactions because they happen close to instantly in the marketplace at whatever the current price is at that point in time. The trade is executed, and the parties involve exchange money for shares, despite the fact that the trade may not settle for a few days.

Retailers and banks frequently complete many cash transactions each day. Clerks and tellers can inadvertely miscount cash and change. These variances between what the business expects and actual amounts of cash at the end of a shift are recorded in a cash-over-short general ledger account. 

In contrast, a futures contract is not considered a cash transaction. Although the price and quantity of an item to be sold are agreed upon when the parties enter into the contract, the exchange of money and delivery of the item does not happen immediately. Purchase with a credit card is not considered a cash transaction, as the person making the purchase does not pay for the item until they pay their credit card bill, which may not occur until much later. Under some definitions of a cash transaction, all aspects of the trade, including the delivery of payment, must be be finalized on the trade date.

Example of a Cash Transaction

For example, a person walks into a store and uses a debit card to purchase an apple. The debit card functions the same as cash as it removes the payment for the apple immediately from the purchaser's bank account. This is a cash transaction. If the person had used a credit card to purchase the apple, no money would have been immediately forfeited by the purchaser, so it would not be a cash transaction. The purchaser would not actually give up money for the apple until they paid the "apple" line item on their credit card bill.

Federal law requires a person to report cash transactions of more than $10,000 to the IRS. Here are some facts about reporting these payments.

Cash Transactions and the Internal Revenue Service (IRS)

According to federal law, cash transactions in excess of $10,000 must be reported to the Internal Revenue Service (IRS) using Form 8300. Cash includes "coins and currency of the United States or any foreign country. For some transactions (PDF), it’s also a cashier’s check, bank draft, traveler’s check or money order with a face amount of $10,000 or less."

A person must report cash of over $10,000 received as either a lump sum, in two or more payments within 24 hours, as a single transaction within 12 months, or as two or more transactions within 12 months.

Form 8300 must be filed within 15 days after the date the cash is received.