What Is a Cash Equivalent Transaction?

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Whether you realize it or not, you probably engage in cash equivalent transactions on a regular basis. When you perform a cash equivalent transaction, you’re offering or accepting "a cash equivalent" in lieu of actual cash. Learn what is considered a cash equivalent to become a more savvy consumer.

Definition

  • A cash equivalent is something that can be easily redeemed for actual cash, like a check, money order or traveler’s check. Gaming chips are often also considered a cash equivalent, because they have a set monetary value and can be readily cashed in. A cash equivalent transaction, thus, is a financial transaction in which a cash equivalent, rather than cash, changes hands.

Sample Transactions

  • Perhaps one of the most common cash equivalent transactions is using money orders to pay for goods or services, because the recipient must then cash in the money order. If you’re a frequent traveler, you’re likely used to purchasing foreign currency. This too is a cash-equivalent transaction, because the foreign currency isn’t usable in your home country, but can easily be taken to a bank and traded back into the home country’s currency.

Purpose

  • Frequently, people choose cash equivalent transactions over straight cash transactions because cash equivalents tend to be easier to trace. For instance, someone who loses a money order can contact the issuer to put a stop payment on it, much like with a personal check, and then get his money refunded. Once cash is lost or stolen, it’s gone for good.

Potential Pitfalls

  • Not everyone takes all cash equivalents, so make sure in advance that the business will take that form of payment you plan to use, whether it’s a money order, traveler’s check or something else. Additionally, be aware that cash equivalent transactions can cost more than the cost of the actual transaction. For instance, a you’ll have to pay for the cost of purchasing the money order or traveler’s check.

References

  • Photo Credit Jupiterimages/Comstock/Getty Images
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