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A transaction is the exchange of goods, services, or money for both commercial and non – commercial purposes. A finalised agreement between two parties to trade products, services, or assets for money is referred to as a transaction in accounting.
Business Transaction
A business transaction is a financial transaction involving the exchange of goods, money, or services between two or more people. For a commercial transaction, the monetary worth of the trade should be measured in such a way that it can be documented for accounting purposes. The financials of the company engaged will be impacted by business transactions. A cash purchase or a long-term service contract are examples of the business transactions.
Types of Business Transactions in Accounting
There are two types of business transactions in accounting which are given below;
- Cash Transactions and Credit Transactions
- Internal Transactions and External Transactions
Cash Transactions and Credit Transactions
Cash Transactions
When a transaction is labelled as a cash transaction, it signifies that the payment was made or received in cash at the time of the transaction. For example, if Mary buys a new shirt from a store and pays at the checkout, Mary and the store have engaged in a cash transaction. Even if the payment is made with a debit or credit card, this transaction is still recognized as a cash transaction since the payment is made at the time the transaction occurs.
Credit Transactions
Payment which is made in a credit transaction after a defined length of time, often known as the credit period. Mary, for instance, wishes to buy a couch from a furniture store. Instead of accepting payment at the time of purchase, the store accepts payments up to 30 days later. Although no cash is exchanged at the time of sale, Mary will be obliged to pay for the couch after the 30-day credit period has expired.
Internal Transactions and External Transactions
Internal Transactions
Internal transactions (also referred to as non – transactions) are ones that take place without the involvement of any external parties. These transactions do not include the exchange of values between two parties, but the occurrence that includes the transaction is monetary in form and has an impact on the financial condition of business. Examples of internal transactions involve recording depreciation of fixed assets and realising the loss of assets destroyed by fire etc.
External Transactions
External transactions (also considered as exchange transactions) are transactions in which a company trades money for goods or services with third parties. All transactions that aren’t internal are typically referred to as external transactions. These are the common transactions which a firm undertakes on a daily basis. Examples of external transactions involve purchase of goods from suppliers, sale of goods to consumers, purchase of fixed assets for business use, payment of rent to owner, payment of gas, electricity or water bills, payment of salary to staff etc. External transactions make a major amount of any business transactions.
Quantitative Change
When the value of assets and obligations of a company changes, this is referred to as a quantitative change. When a fire destroys a $10,000 piece of machinery, the company’s assets will be reduced in value. Because the loss can be documented for accounting purposes, this is a business transaction.
Qualitative Change
When distinct parts of assets or obligations alter, a qualitative change occurs. For example, if a company wants to replace a machine that was destroyed in a fire, it will pay $10,000 for a new machine. The corporation loses $10,000 but acquires $10,000 worth of equipment. The value of the assets does not change, but the company’s financial situation does, hence it is a business transaction.
Transaction Proof Document
The bookkeeper records each transaction by making a journal entry. This will have an influence on the company’s financial condition. Thus, the bookkeeper or accountant must double-check that the transaction has been allowed by the responsible person and is backed up by documents as proof before entering it into the journal.
Sales invoices, purchase invoices, payment vouchers, money orders, account statements, , promissory notes, and other documents consisting basic facts which can be submitted as legitimate proof are common examples of documents used as evidence.
Conclusion
A transaction is the exchange of goods, services, or money for both commercial and non – commercial purposes. A business transaction is a financial transaction which involves the exchange of goods, money, or services between two or more persons. A cash purchase and a long-term service contract are examples of the business transactions.
There are two types of business transactions in accounting which are given below:
- Cash Transactions and Credit Transactions
- Internal Transactions and External Transactions
When a transaction is labelled as a cash transaction, it signifies that the payment was made or received in cash at the time of the transaction. Internal transactions (also referred to as non – transactions) are ones that take place without the involvement of any external parties. When the value of a company’s assets and obligations changes, this is referred to as a quantitative change. When distinct parts of assets or obligations alter, a qualitative change occurs.
