Puzzled! What is non-cash transaction? This article helps you to understand the basic concept of non-cash transaction, what is it? What type of transactions lies in this type? ย
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What Is Non-Cash Transaction?
A business transaction (selling or buying a thing) that does not involve cash is called non-cash transaction. It is an economic event that occurs when a company do a financing related transactions without being cash engaged into it. In these types of transactions, sometimes the company writes a promissory note instead of using cash.
- Does not involve cash
- ย An economic event
- A business transaction
- Includes Depreciation, stock issuance etc.ย
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Example
According to GASB (Governmental Accounting Standard Board) 9, paragraph 37, the following are the examples of non-cash transactions:
- Purchase of asset (property, plant or equipment) by issuing stock convertible bonds
- Exchange of one property for other property
- Increase or decrease in the fair market value of investments
- Expire debt in exchange of issuing additional debt.
- Purchase of an asset by having capital lease contract.
- Expire debt in exchange of selling a fixed asset.
Explanation
Non-cash transactions- the term in itself is quite indicative that it is the opposite of cash transaction. In business there are numerous number of transactions. In which there may not be a movement in terms of cash or May the movement takes place in later time or no movement at all. So, to give a more accurate picture to their current financial condition, non-cash transaction effects are also added.
- Purchase of asset by issuing stock convertible bonds. In other words, instead of converting bonds into cash and then buying assets. A company buys an asset through issuing bonds. For example, purchase of land and building through issuance of 250,000 shares of common bond.
- Exchange of one property for other property: In this type, instead of selling a property and then purchasing a property. The company exchange its property with another property. For instance, Exchange land in California, for land in Sydney.
- Depreciation: Depreciation is recorded on a fixed asset to calculate the reduction in the value of asset over a time. Depreciation is considered as non-cash expense. When a company buys a fixed asset it is recorded in the companyโs balance sheet. Every year the value of fixed asset is reduced because it is being used. But this expense is non-cash because company does not pay for it. For instance, a company bought computer for 100,000, its useful life is 3 years and it will be depreciated by 33%. Company doesnโt has to pay for this expense, rather it reduces the value of asset.
Cash Transaction vs Non-Cash Transaction
Cash transactions and non-cash transactions are two different methods of conducting financial transactions. In cash transactions immediate payment is made and cash is exchanged. While the prior one does not involve cash nor the cash is exchanged. These are some of the significant non-cash activities they are usually reported at the bottom of the statement of cash flows, to provide significant information. Another way of presenting it can be a note in the financial statement.ย
Let’s explore each of them:
Cash Transactions: Cash transactions involve the use of physical currency (such as banknotes and coins) to exchange value. In a cash transaction, the buyer typically pays the seller directly with cash at the time of the transaction. Cash transactions are immediate and involve the transfer of tangible money from one party to another.
Advantages of Cash Transactions:
- Simplicity: Cash transactions are straightforward and require minimal infrastructure or technology.
- Immediate Settlement: Cash transactions provide instant payment and immediate finality of the transaction.
- Anonymity: Cash transactions can be conducted anonymously, as there is no electronic record linking the buyer and the seller.
Disadvantages of Cash Transactions:
- Risk of Theft: Physical cash is vulnerable to theft or loss, making it less secure than digital transactions.
- Lack of Traceability: Cash transactions do not leave a digital trail, making it difficult to track and reconcile financial records.
- Limited Convenience: Carrying large amounts of cash can be inconvenient, especially for significant transactions or in online settings.
- Non-Cash Transactions: Non-cash transactions involve the use of various electronic payment methods instead of physical currency. These methods can include debit or credit cards, electronic fund transfers, mobile payments, online banking, and digital wallets.
Advantages of Non-Cash Transactions:
- Convenience: Electronic payment methods provide ease of use, especially in online or digital environments.
- Security: Non-cash transactions can offer enhanced security features, such as encryption and fraud protection.
- Record Keeping: Digital transactions leave a digital trail, allowing for better record keeping, tracking, and reconciliation of financial transactions.
Disadvantages of Non-Cash Transactions:
- Dependency on Infrastructure: Non-cash transactions require appropriate infrastructure, such as internet connectivity or electronic payment systems, which may not be universally available.
- Potential Technical Issues: Electronic payment methods can sometimes encounter technical issues, such as system failures or connectivity problems.
- Transaction Fees: Some non-cash transactions may involve fees, such as processing fees or transaction charges, which can add to the overall cost.
It’s important to note that the choice between cash and non-cash transactions often depends on various factors, including the nature of the transaction, the convenience and security requirements, and the availability of payment options. Both methods have their own advantages and disadvantages, and individuals and businesses may choose to use a combination of cash and non-cash transactions based on their specific needs and circumstances.
Non Cash Transaction Standards
Non-cash transactions adhere to various standards and protocols to ensure secure and efficient electronic payment processes. Here are some of the commonly used standards for non-cash transactions:
EMV (Europay, Mastercard, and Visa): EMV is a global standard for payment cards and terminals. It uses chip-based technology to enhance the security of card-present transactions, reducing the risk of fraud through counterfeit cards.
PCI DSS (Payment Card Industry Data Security Standard): PCI DSS is a set of security standards established by major credit card companies to protect cardholder data during payment transactions.
ISO 20022: ISO 20022 is an international standard for financial messaging. ISO 20022 enables interoperability and promotes straight-through processing of non-cash transactions.
SWIFT (Society for Worldwide Interbank Financial Telecommunication): SWIFT is a messaging network used by financial institutions worldwide. It facilitates non-cash transactions, including international wire transfers and other forms of financial messaging.
NACHA (National Automated Clearing House Association): NACHA manages the ACH (Automated Clearing House) Network, which enables the electronic transfer of funds between bank accounts in the United States.ย
Open Banking APIs: Open Banking refers to the use of open Application Programming Interfaces (APIs) to enable secure data sharing and integration between different financial institutions and third-party service providers. Open Banking APIs facilitate non-cash transactions, account information retrieval, and payment initiation across multiple platforms.
These standards help establish secure communication, interoperability, and standardized formats for non-cash transactions, ensuring the integrity, confidentiality, and efficiency of electronic payment processes. They play a crucial role in promoting trust and confidence in the digital payment ecosystem.
Key Points
- Noncash transactions does not involve cash in it.
- Cash transactions are immediate payments and involve cash.
- Non cash transactions include depreciation, exchange of property from other property or issue stocks for purchasing of an item.
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Cash Flow Statement Template
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