Transactions

What are Transactions?

The meaning of transactions in accounting is a finalised deal between two parties to trade products, services, or financial assets in exchange for money or kind, is known as an Accounting Transaction. Transactions directly impact the company’s financial condition and financial statements. The accounts, financial statements and reports are prepared based on transactions. Some of the examples of business transactions are:

• Cash sales and credit sales to customers
• Receipt of money from a client
• Assets, both fixed and moveable, are purchased
• Taking out a loan from a creditor
• Repaying a creditor for money borrowed
• A monetary payment to a supplier

How are Transactions treated in Business Bookkeeping?

This simple notion of “financial transactions” can be complex in business terms. Whether a corporation utilises accrual accounting or cash accounting, a transaction may be recorded sooner or later. When using the cash foundation of accounting, a transaction is documented each time cash is spent or received. Alternatively, the accrual foundation of accounting records a transaction when revenue is recognised, or a cost is incurred, regardless of cash flow.

Every transaction must demonstrate the flow of balance between assets and liabilities, or debit and credit. A cash reception from a client equals a rise in revenue, and purchase from a supplier equals an increase in expenditures and a cash drop.

A high-volume transaction, such as a customer billing, may be recorded in a special journal before being aggregated and submitted to the general ledger. On the other hand, lower-volume transactions are logged immediately to the public ledger.

Features of Transactions

The trade must have the following characteristics to be deemed a commercial transaction:

1. The transaction could result in profit or loss.
2. For a transaction to occur, a buyer and a seller must be involved.
3. A source document backs up the transaction (an invoice, sale order, receipt, etc.) The transaction is for the benefit of the company entity, not for personal gain.

If a company’s account cannot document a transaction, it is unlikely to constitute a commercial transaction. The company’s financial status must change as a result of commercial transactions. This can be done in two ways: quantitatively or qualitatively.

Quantitative Change: When the value of a company’s assets and obligations changes, this is a quantitative change. If a fire damages an INR 10,000 piece of machinery, the company’s assets will be reduced in value. Because the loss may be documented for accounting purposes, this is a commercial transaction.

Qualitative Change: When distinct parts of assets or liabilities change, this is a qualitative change. For example, if a corporation wants to replace a machine destroyed in a fire, it will pay INR 10,000 for a new unit. The corporation loses INR 10,000 but acquires INR 10,000 worth of equipment. The value of the assets does not change, but the company’s financial situation does; hence, it is a commercial transaction.

Types of Transactions that are based on the Exchange of Money

There are three types of accounting transactions based on the exchange of currency: cash transactions, non-cash transactions, and credit transactions.

1. Transactions in cash are the most typical kind of transactions, referring to those involving money. A cash transaction occurs when a corporation acquires office supplies and pays for them with cash, a debit card, or a cheque.

2. Transactions that are not made in cash – These transactions have nothing to do with transactions that detail whether money has been paid or will be paid in the future. For example, if Company A buys a machine from Company B and discovers it is broken, it will not cost any money to return it; therefore, it is classified as a non-cash transaction. Non-cash transactions, in other terms, are transactions that do not involve cash or credit.

3. Transactions on credit – Payment is promised and executed later; hence they have delayed cash transactions. Companies may provide credit periods for payment, such as 30 days, 60 days, or 90 days, depending on the product or service given or industry norms.

Accounting Transactions by Institutional Relationship Types

Various perspectives of view can influence the sorts of accounting transactions. According to institutional ties, external and internal transactions will first discuss the types of accounting transactions.

1. Transactions occur globally – These entail the exchange of commodities and services for monetary value. As a result, any transaction involving two people or organisations, one buying and the other selling, can be classified as an external transaction. It’s also known as a business deal.

Example: An external transaction occurs when Company X purchases raw materials for its manufacturing process from Company Y.

2. Transactions inside the company – They have nothing to do with sales and everything to do with internal business operations. These transactions might involve calculating staff salaries and evaluating the depreciation value of a particular item.

Accounting Transaction Types based on the Goal

There are two accounting transactions based on the aim: business and non-business.

1. Business transactions are the day-to-day activities that keep a company going, such as sales and purchases, office rent, advertising, and other costs.

2. Non-business transactions do not entail a sale or purchase but involve charitable giving and social responsibility.

3. Personal transactions are transactions carried out for personal reasons, such as birthday expenses.

Double-entry Accounting Transactions Bookkeeping

The double-entry accounting technique is a bookkeeping system in which every entry to one account needs an opposing input to a separate account, resulting in balanced journal entries. It will ensure that total debits and total credits are always equal. The debit (left) and credit (right) sides of a double-sided journal entry are equal and matching (right).

Conclusion

In short, all monetary transactions are supposed to be recorded in the books of accounts to prepare the company’s financial statements during each accounting year. Transactions vary depending on the type of transaction and its effect on the business activities and accounts.