Unit-5 Journal

This unit explains the method of applying the rules of debit and credit to business transactions and how exactly the entries are made.

Explain the distinction between cash and credit transactions.

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Learning Pundits Content Team

Written on Apr 17, 2019 6:03:48 PM

  1. The key difference between cash and credit is that one is your money (cash) and one is the bank’s (or someone else’s) money (credit).
  2. When you pay with cash, you hand over the money, take your goods and you are done. Which is great, as long as you have the money.
  3. When you pay with credit, you borrow money from someone else to pay. Usually this money does not come for free. Yes, you need to pay back the money you borrowed, but there is also usually an additional amount you have to pay back – this is called interest.
  4. Interest is usually expressed as a percentage rate per annum (or per year), you have probably seen it like this %p.a. It’s the amount you have to pay back ON TOP of the amount you borrowed. Let’s say you borrow $1,000 for 1 year at 10%p.a. Over the year, you will actually need to pay back $1100 - usually in monthly installments. 
  5. The interest rate you pay can vary depending on the type of credit you choose and the lender you borrow from. The higher the interest rate, the more money you will pay in interest over time. The lower the interest rate, the less money you will pay in interest over time.
  6. It can take some time to save up enough money for a big purchase, like a car. One of the benefits of using credit is that you can buy the thing you want now, even if you don’t have the cash saved up yet.
  7. If you are going to use credit, it’s important to factor in how much the credit will cost you until you pay it back. Some loans also have monthly fees or set up fees, make sure you factor in all these costs as well.

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