What is Cash Sale?
Cash Sales are the business transactions which company receive immediate payment after selling goods or service. Buyers fulfill the payment obligation right after receiving goods or services. It is not compulsory that seller need to receive cash to consider it as Cash sale. The payment can be made in the form of cash, bill, check, coin, and credit card.
Cash Sales opposite from credit sale which seller allows the customer to use goods or services and settle balance later. For cash sale, there is no risk of uncollectible accounts receivable or bad debt expense.
The company will record cash and sale. Difference from credit sale which needs to record through accounts receivable.
Cash Sales Journal Entries
Cash sales involve only cash and revenue accounts.
| Account | Debit | Credit |
|---|---|---|
| Cash | XXXX | |
| Sale | XXXX |
However, if there is VAT involve, we need to take into account VAT payable as well. It is the liability which company collects cash from the customer and pays to the government. The entry would be:
| Account | Debit | Credit |
|---|---|---|
| Cash | XXXX | |
| Sale | XXXX | |
| VAT Payable | XXXX |
Cash Sales Example
EFG is a retail store that sells various goods include grocery, wine, and cigarettes. The grocery will not subject to VAT while wine & cigarettes will subject to VAT 10%.
- Customer purchases $ 1,000 of grocery and pays the cash, journal entries should be:
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Sale | 1,000 |
- Customers purchase $ 5,000 of wine which includes a VAT of $ 500.
| Account | Debit | Credit |
|---|---|---|
| Cash | 5,000 | |
| Sale | 4,500 | |
| VAT Payable | 500 |
Benefit of Cash Sales
| Advantage of Cash Sales | |
|---|---|
| Easy and Simple | We simply record sales and cash without worrying about accounts receivable. The company needs to record only one time while credit sale require to record accounts receivable and cash collection. |
| Ensure cash collection | Cash will be 100% collect. The company will not require to assign employees in collecting the cash from customers. |
| No bad debt | Bad debt is an expense for the company. With cash sales, the company will not concern about the bad debt expense that decrease company profit. |
| Enough cash flow to support operate | Cash sales will allow the company to have enough cash to pay suppliers and employees. Most of the company bankrupt due to a lack of cash flow rather than operating loss. So receive cash immediately after-sale will help the company to manage its cash flow effectively. |
| Suitable for retail business | It is not practical to keep track of receivables over the retail customer. |
Disadvantage of Cash Sales
| Disadvantage of Cash Sales | |
|---|---|
| Not practical for the whole seller | Wholesalers are looking for suppliers who can give them a good credit term. So that they have enough time to collect cash and make the settlement later. They will not purchase if the seller require immediate payment. |
| Competitive advantage | With the same price and quality, our customers will turn to the competitors who allow them to buy on credit. |
| Attract new customers | Credit sale will attract new customers to try our product and service. To increase confidence, the company can use the return policy in case customers not happy with goods. |
| Increase sale volume | Customers will not under pressure to pay immediately so they will increase their purchases. |
Key Features of Cash Sale
Cash sales refer to transactions where goods or services are exchanged for immediate payment in the form of cash. The key features of cash sales include:
Immediate Payment:
-
- In a cash sale, payment is made at the time of the transaction.
- This feature ensures that the seller receives funds instantly, providing liquidity.
No Credit Involved:
-
- Unlike credit sales where payment is deferred, cash sales involve no credit terms.
- The absence of credit reduces the risk of payment default and associated complications.
Simplicity:
-
- Cash sales are characterized by a straightforward and simple transaction process.
- There is minimal paperwork and fewer administrative complexities, making it efficient for both parties.
Quick Closure:
-
- Cash sales are known for their speed, as transactions can be completed rapidly.
- This quick closure benefits both buyers and sellers, especially in situations where time is a critical factor.
Transparency:
-
- There is a high level of transparency in cash sales.
- The immediate exchange of cash provides clarity in financial dealings, reducing the likelihood of disputes.
Certainty of Payment:
-
- Sellers have the assurance of receiving payment at the time of the sale.
- This certainty contributes to improved cash flow and financial stability.
Accountability:
-
- Cash sales simplify the accounting process for businesses.
- There is reduced complexity in financial records, making tracking and reconciliation more straightforward.
Flexibility:
-
- Cash sales are flexible and applicable across various industries.
- They can involve the sale of products or services and are adaptable to different business scales.
Risk Mitigation:
-
- The immediate nature of cash sales mitigates the risk of non-payment or default.
- Sellers can avoid the uncertainties associated with credit transactions.
Customer Relations:
-
- Cash sales can contribute to building trust between buyers and sellers.
- The immediacy of the transaction meets customer needs promptly, leading to positive customer experiences.
Efficiency:
-
- Cash sales promote efficiency in financial management for both parties.
- Sellers can manage their cash flow more effectively, while buyers benefit from the simplicity of the transaction.