Most business transactions for buying and selling goods or services are either cash transactions or credit transactions. With a cash transaction, the buyer pays for the item either upon exchange of goods/services or they pay in advance. For example, sales in a shop or supermarket are cash transactions, because the customer pays at the cash desk or check-out point. With a credit transaction, the buyer doesn't pay for the item on receipt, but is allowed some time (a 'credit period') before having to make the payment.
Velocity Book Publishers places an order with a printing company, Q Print, to print 5,000 copies of a new book they are publishing. Q Print agree to print the books and Velocity Book Publishers will be given up to 60 days to pay after the books have been printed. Q Print delivers the books into the warehouse of Velocity Book Publishers on 1 March, and submits a demand for payment (known as an invoice) for $15,000, payable on or before 1 May.
This is a credit transaction because Velocity Book Publishers does not have to pay for the purchased items when it orders the books, nor even when the books are received. Instead, it has been given time to pay after the goods have been received.
Most transactions between two businesses are credit transactions. In other words, businesses usually buy from other businesses and sell to other businesses on credit. The credit terms, such as how long the buyer has to pay, are agreed between the buyer and the supplier in advance.
| Cash | Credit | |
|---|---|---|
| Sale | Goods are sold or a service provided and the customer pays immediately. | Goods are sold or a service provided and the customer pays at a later date. |
| Purchase | Goods are purchased or a service received and is paid for immediately. | Goods are purchased or a service received and paid for at a later date. |
A client receives a haircut by a self-employed hairdresser. The client pays for this with $20 cash.
For a suggested answer, see the 'Answers' section at the end of the book.
Every purchase from one party's perspective is a sale from the other perspective of the other party to the transaction. The purchaser makes payment and seller receives it in exchange for the goods or services supplied.
You need to understand the different methods of receiving payment from customers, or making payments to a supplier. Four common methods of receiving and making payments used in many businesses are:
Receiving and making payments by each of these methods will be explained in subsequent chapters.