Key Concepts
There are two types of business transactions:
| Type | Meaning | Keywords | Cash account used |
|---|---|---|---|
| Cash transaction | Cash is paid or received at the time of the transaction |
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| Credit transaction | Cash is paid or received AT A LATER DATE |
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What is a cheque?A cheque is a written instruction from an account holder telling their bank to pay a specific amount to a named person or business. When you write a cheque, the money leaves your bank account — so it is treated the same as paying cash immediately.
Note: "Paid by cheque" is still a cash transaction — a cheque is treated as cash in accounting.
Ask: "Did money change hands right now?"
- Yes → Cash transaction
- No → Credit transaction (payment comes later)
- Purchased inventory from Shu Fen, paid $800 by cheque.
- Sold goods to Arjun on credit for $1,200.
- Received $1,200 in cash from Arjun in full settlement.
- Bought inventory on credit from Kavitha for $600.
Cheque = money leaves the bank immediately → Cash transaction.
Account: Cash at bank (cheque payments always use Cash at bank).
Cash is received at a later date → Credit transaction.
Account: Trade receivables — Arjun (Arjun owes Firefly Traders).
Cash is received right now → Cash transaction.
Account: Cash in hand (physical cash received).
Cash is paid at a later date → Credit transaction.
Account: Trade payables — Kavitha (Firefly Traders owes Kavitha).
Treating cheque payments as credit transactions. A cheque is treated as cash. "Paid by cheque" is a cash transaction — record it in the Cash at bank account, not in Trade payables (that account is only used when payment is made later, on credit).
Assuming credit transactions involve no cash at all. Credit transactions still involve cash being paid — just later, not at the time of the transaction.