What it means
Accounting distinguishes between incurring a cost and paying for it. When a supplier delivers goods and invoices them, the business has a cost (an expense or an asset) and a liability (a payable).
When it pays the invoice, the liability is discharged and cash leaves: that is the cash payment. The gap between the two, the credit period, is part of working capital, and the timing of cash payments is one of the main tools of cash management.
In the broad sense, cash payments cover every method by which money leaves the business's accounts. Electronic transfers dominate business payments: same-day and batch transfers to suppliers, payroll runs, direct debits for recurring commitments, card payments for small purchases and online services.
Cheques persist in some countries and sectors. Each method has its own timing (when the money actually leaves), cost (bank charges, card fees) and control profile (who can initiate and approve), and the business's payment policy sets which method is used for what.
In the narrow sense, payment in physical cash is now a small part of business activity but a disproportionate source of problems. Cash paid out from a till or petty cash box for small purchases needs a receipt and a record, or expenses go unrecorded and cash goes missing.
Cash paid to casual workers or contractors without documentation raises tax and employment law risks. Cash paid to suppliers who prefer it may indicate that the supplier is not declaring the income.
Many jurisdictions cap cash transactions (commonly at amounts between $1,000 and $15,000), require reporting of large cash payments, and treat undocumented cash payments as non-deductible for tax. Businesses that handle cash routinely (retail, hospitality, transport) run petty cash on an imprest system: a fixed float, every payment supported by a voucher, the float topped up by exactly the amount spent, and the box counted regularly.
Controls over cash payments in either sense follow the same pattern: a valid obligation (an approved invoice, an authorised expense claim, a receipt), an approval by someone with authority who is not the person making the payment, a record at the time of payment, and a reconciliation of the record to the bank statement or the physical count. Payment runs on fixed dates, approval thresholds, dual authorisation above a limit, and independent verification of payee bank details are the standard elements for electronic payments; vouchers, receipts, a locked box and a regular count are the elements for physical cash.
For tax and audit purposes, the evidence of a cash payment is what makes it deductible and traceable: the bank record for electronic payments, and the receipt and voucher for physical cash. A payment without evidence is, to an auditor or tax inspector, a payment that may not have happened, or may have happened for a reason the business would rather not record.
In practice
Real-world examples.
Example
A construction company pays subcontractors by transfer against certified valuations, never in cash, and retains 5% until practical completion.
Example
A market trader pays her wholesaler in cash each morning and keeps the receipts in a numbered book that her accountant reconciles monthly.
Example
A company's policy limits card payments to $500, petty cash to $50 per item, and requires transfers for everything else, with two approvals above $10,000.
Think of it
“Cash payments are the money going out to pay for things-your spending in real cash terms.
Formula
Calculation
Cash payments in period (from the ledger) = Opening payables + Expenses and purchases incurred minus Closing payables (for supplier payments)
Petty cash imprest: Float = Cash in box + Vouchers for payments made; Top-up = Total of vouchers since last top-up
Worked example 1, supplier payments from the accounts. A café's accounts show: opening trade payables $18,400; purchases and expenses invoiced during the month $63,700; closing trade payables $21,100.
Cash paid to suppliers = $18,400 + $63,700 minus $21,100 = $61,000. The cash book shows supplier payments of $61,000, so the payables ledger and the cash book agree. Had the cash book shown $58,000, the $3,000 difference would need investigation: an unrecorded payment, a payment recorded against the wrong account, or a supplier balance carried in error.
Worked example 2, petty cash on the imprest system. The café's petty cash float is $300. During a fortnight, the manager pays from the box: milk (top-up when the delivery was short) $18.50; window cleaner $35; postage $12.40; taxi for a staff member after a late shift $22; light bulbs $9.60; a cake stand for a display $41. Vouchers total $138.50. Cash counted in the box: $161.50. Float check: $161.50 + $138.50 = $300. The float is intact. The bookkeeper tops up the box with $138.50 (debit the expense accounts by category: purchases $18.50, cleaning $35, postage $12.40, staff costs $22, repairs $9.60, equipment $41; credit bank $138.50), and the box returns to $300.
Had the count been $141.50, the box would be $20 short: an unvouched payment or a theft, investigated on the day. Had a $250 payment been made from the box for a supplier who "only takes cash", the manager would have exceeded the $50 single-payment limit in the policy and the bookkeeper would query both the payment and the supplier.
Worked example 3, the cost of payment methods. The café pays its main supplier $12,000 a month. By bank transfer the cost is nil. By business credit card (which the supplier surcharges at 1.5%) the cost is $180 a month but the card gives 45 days of credit; at the café's 8% overdraft rate, 45 days of credit on $12,000 is worth $118. The surcharge exceeds the value of the credit, so the café pays by transfer on the due date.Case study
Seen in the real world.
A small chain of car washes paid its casual staff, its water and chemical suppliers and much of its equipment maintenance in cash from the day's takings, recording the payments in a notebook at each site when the site manager remembered. The owner saw the arrangement as simple and flexible. A tax inspection found that recorded takings across the sites were about 30% below what the water usage and chemical purchases implied, that the cash payments to staff had not been declared as wages, and that $90,000 of cash payments had no receipts and were disallowed as expenses.
The assessment, with penalties and interest, came to $210,000, and the owner faced a separate inquiry over the undeclared wages. The rebuilt system banked takings daily and intact, paid staff through payroll by transfer, paid suppliers by transfer against invoices, and ran a $200 petty cash imprest at each site for genuine small items with a $30 limit and a voucher for every payment.
Takings rose 20% in recorded terms with no change in customers, which the owner acknowledged had been the point. His accountant's note observed that the cash payments had not been simple; they had been unrecorded, which is a different thing, and the difference had cost $210,000.
Watch out
Common mistakes.
- Paying from cash takings before banking them, which understates both sales and expenses and makes reconciliation impossible.
- Making cash payments without a receipt or voucher, which leaves them undeductible for tax and untraceable in an audit.
- Confusing the accrual of an expense with its payment. The invoice creates the cost; the cash payment settles it; the gap is working capital.
Questions
People also ask.
Is a card payment a cash payment?
In accounting terms, yes: it moves money out of the business (immediately for a debit card, at statement date for a credit card). In everyday usage, "cash payment" usually means physical currency.
Are there legal limits on cash payments?
In many countries, yes: caps on the amount that can be paid in physical cash for a single transaction, reporting requirements for large cash payments, and anti-money-laundering obligations for businesses that accept large cash sums.
How should petty cash be run?
On the imprest system: a fixed float, a voucher and receipt for every payment, a single-payment limit, a periodic count, and a top-up equal to the vouchers. Cash plus vouchers should always equal the float.
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