DEFINITION of 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.
BREAKING DOWN Cash Transaction
A cash transaction can have many different definitions. Essentially, it is an immediate cash payment in exchange for receipt of an item. Under some definitions, market stock transactions can be considered cash transactions because they happen nearly 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.
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 doesn't happen immediately. Purchase with a credit card is not considered a cash transaction, as the person making the purchase doesn't pay for the item until they pay their credit card bill which may not occur until much later. Under some definitions of cash transaction, it is required that all aspects of the trade, including the delivery of payment, 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.