Cash Transactions: Definition, Types, How to Report - Shopify (2024)

Cash still plays a big role in society.

The COVID-19 pandemic changed how people use and hold cash, causing a dip in cash use. Some people swear cash is dying, and that we should just accept contactless payments and move on.

But as of August 2022, cash accounted for 20% of all payments, up from 19% in 2020, according to key findings from the Diary of Consumer Payment Choice. Some states, like Colorado, even passed legislation requiring retailers to accept cash payments.

If you’re a retailer considering different payment methods to offer in-store, cash is still a smart option. This article discusses cash transactions, how to record them, and reporting requirements from the Internal Revenue Service (IRS).

What is a cash transaction?

The term "cash transaction" refers to any deal in which money changes hands. In retail businesses, cash transactions usually happen when customers pay with cash in-store. Cash can come in the form of paper bills or coins.

Cash payments vs. non-cash transactions

There are two types of transactions: cash and non-cash.

• Cash transactions are those in which cash changes hands, while non-cash transactions do not involve cash exchange.
• Non-cash transactions can be made using credit cards, debit cards, or checks.

The main advantage of cash transactions is that they are immediate; the buyer receives the goods or services right away, and the seller receives payment at the same time.

Cash transactions are also convenient since they do not require using a bank account or credit card. The main disadvantage of cash transactions is that they are risky; if the buyer does not have enough cash, the seller may not receive payment.

Examples of non-cash transactions are:

• Forward contracts. An agreement to buy or sell an asset at a later date. The asset can be anything but is often a financial asset such as a currency, commodity, or stock.
• Options contracts. An agreement that gives the holder the right, but not the obligation, to buy or sell an asset at a specified price on or before a specified date. Options contracts are often used to hedge against the risk of price movements in the underlying asset.
• Futures contracts. An agreement that obligates the buyer to purchase, and the seller to sell and deliver, an asset at a specified price on a specified date in the future. Futures contracts are often used to hedge against the risk of price movements in the underlying asset.
• Swaps. A credit default swap (CDS) is a financial contract that transfers the credit risk of a financial asset from one party to another. A CDS can be used to hedge against the risk of default on a debt obligation, or to speculate on the probability of default.

Payment for goods and services can also be made using electronic means, such as:

• Credit cards
• Debit cards
• ACH transfers
• Wire transfers
• Electronic checks
• Cryptocurrency

The main advantage of electronic payments is that they are safe and secure. Electronic payments are also convenient, since they can be made anywhere worldwide. The main disadvantage of electronic payments is that they can take several days to process.

Recording cash transactions

You need to track your retail sales and revenue when running a brick-and-mortar store. That’s why it’s important to record all cash transactions.

There are a few ways to do this: sales receipts, bank reconciliation, cash sheets, and POS data.

Sales receipts

One way to record cash transactions is by using your sales receipts. You need to tally up sales receipts chronologically and record each cash transaction chronologically.

Keep a cash journal for all receipts and invoices. A cash journal records all credit sales made by a business. A journal entry should include the sale date, the customer's name, a description of the merchandise sold, the amount of the sale, and the sales tax.

Below is an example of a cash journal.

Here’s how to use the cash receipt journal:

• Date: Record the date when you received the cash.
• Account credited: Input the account name credited due to the cash transaction.
• Ref: Enter any internal reference numbers.
• Explanation: Write a short explanation of the cash transaction.
• Cash dr: Record the amount of cash received into the general ledger.
• Sales discount: Note any discounts awarded to the buyer.
• Accounts receivable Cr: Record the amount credited to a customer’s account.
• Sales cr: Record the cash sale amount.
• Other accounts cr: Record receipt of cash from other sources, like interest or rent.

Bank reconciliation

Another way to track cash is by reconciling your bank account. You check your bank statements against your records to make sure there aren't any discrepancies. You’d get an overview of all your transactions, not just cash. Reconciliation should be done every month, regardless of when the cash was received or paid.

Follow these eight steps to reconcile your bank statements:

1. Know your ending bank balance: This is the foundation for reconciling your bank account. Ensure that you have your most recent statement or have logged into your online banking account to check your ending balance.
2. Compare your records to the ending bank balance: Go through your own records of transactions (usually in the form of a checkbook register, credit card statements, or receipts) and compare them to the transactions listed on your bank statement. Any discrepancies should be investigated.
3. Adjust your records for outstanding checks: If you have any checks written but not yet cleared by the bank, be sure to deduct them from your records.
4. Adjust your records for deposits in transit: If you have made any deposits that have not yet cleared the bank, be sure to add them to your records.
5. Adjust your records for bank service charges or interest. Add or subtract any service charges or interest posted to your account.
6. Reconcile differences: If there are any differences between your records and the bank statement, investigate and determine the cause.
7. Make necessary adjustments to your records: Once you have investigated and determined the cause of any differences, make the necessary adjustments.
8. Update your ending bank balance: Be sure to update your bank balance in your records to reflect any adjustments made.

Cash sheets

Cash sheets are records of cash transactions used by businesses to keep track of their cash inflows and outflows. The cash sheet can track cash on hand, bank balances, and petty cash.

By keeping cash sheets, you'll know if there's any shortage or surplus. Many businesses count cash at the cash register at the end of the day without keeping a cash sheet, leaving them in the dark about shortfalls.

Cash sheets should include the date, type of transaction, amount, and source of funds. It'll help you track cash flow and determine where the money's going.

Some tips when using a cash sheet:

1. Update your cash sheet regularly, preferably daily, to uncover potential discrepancies.
2. Use the cash sheet to help track spending and identify areas where costs can be reduced.
3. Use the cash sheet to help prepare for upcoming cash needs, such as payroll or inventory purchases.

POS data

Point-of-sale (POS) data can help record cash transactions by providing information on each sale. This data can then be used to populate the sales journal and the cash receipts journal.

If you have a POS cash register, a.k.a. a shop till, it combines point-of-sale software with a cash drawer, enabling you to securely receive and track cash payments. A POS system like Shopify comes with tools that assist with cash management, so you can balance your drawer and reduce discrepancies.

For example, you can see a cash payments summary that displays the overview of the cash payments for all sessions that occurred at the selected location within the time range.

Reporting cash payments

How to report cash payments to IRS

You must report the total amount of cash payments that are made in the course of your business. This includes payments made to contractors, suppliers, and employees. Cash includes “coins and currency of the United States or any foreign country” and cashier’s checks, traveler’s checks, or money orders.

When you file your taxes, you must include a statement detailing all cash payments made during the year. Include the payee's name, address, payment date, and amount paid.

Businesses that receive cash transactions of more than $10,000 must report them to the IRS if they receive it:

• In one lump sum
• In two or more related payments within 24 hours
• As part of a single transaction within 12 months
• As part of two or more relationships within 12 months

You can report cash payments to the IRS by filing Form 8300. You’ll need to provide your name, address, and tax ID number when you file Form 8300. Along with the date and amount of the payment, you also need to provide the person’s name and address. You can be fined if you don’t file Form 8300.

You can find Form 8300 on the IRS website.

When to report cash transaction

The form must be filed within 15 days of receiving the cash. You must also provide a copy of the form to the person who made the payment.

Decline in cash transactions

Even before the pandemic, fewer adults were using printed currencies. In an average week, a 2018 study found that roughly three in 10 adults said they make zero purchases using cash.

The COVID-19 pandemic transformed the way people make, spend, and receive payments.

• As people became weary of handling cash, they gravitated toward digital payments.
• According to the World Bank, 76% of adults globally have a bank account now, up from 68% in 2017.
• In low and middle-income economies, over 40% of adults who made in-store or online payments using a card, phone, or the internet did so for the first time during the pandemic.

Accessing cash is becoming harder for consumers, as well. There were an estimated 470,000 ATMs in the US in 2019, per Payments Dive. That number dropped to an estimated 456,000 in 2021.

While cash use is declining, it’s unlikely the US will become a cashless society anytime soon. Small businesses still prefer cash because it helps them save on merchant card fees. State governments have also passed laws prohibiting cash-free businesses, keeping the physical dollar alive.

Manage cash payments at your retail store

When you have a retail business that deals with cash payments, it’s vital to have a system to manage those payments. It helps you keep track of your money, identify discrepancies, and make smarter financial decisions. By following the processes above, you’re well on your way to improving cash management in your store.