Accounting for Business TransactionsĪccounting of business transactions can be done in many ways. They are instead based on internal processes, such as, the use of supplies and depreciation of assets. These transactions do not involve any outside party, and they don’t involve purchases or sales. Internal transactions are an exception to the feature of requiring two parties. They can range from financial activities like paying for utilities to paying the employees. These transactions involve the exchange of goods and/or services for money with external parties. The second criterion for classifying business transactions is whether or not the transaction happens with a third party outside the company. There is no money involved in the transaction, but it does reduce the assets of the company or there could be an exchange that is in kind. For example, a company returns a machine to its manufacturer because it was defective. This category of transactions doesn’t specify whether money is involved. They also charge interest on these payments.
A company often allows deferred payments on big sales as it allows the company to cater to a wider base of customers. The payments, in this case, are deferred, i.e., delayed. However, if a company uses a debit card or a cheque, it is still called a cash transaction. They refer to the transactions that are done by the company using cash. They are the most common type of transaction. The first criterion is whether or not cash is exchanged during the transaction. The classification of business transactions can be done in two ways. If it can’t be added, likely, the event is not a business transaction. The easiest method to find out whether or not an event is a business transaction is to consider whether or not it could be added to an accounting record. Some economic events that occur in the day-to-day operation of a business can’t be considered as business transactions.
The document which provides proof of the event is called a voucher or a source document. The event should be based on documentary evidence, for example, an invoice or a memo. An individual should not conduct it for their own needs. The event must be done on behalf of the company. Two PartiesĪ business transaction requires two or more parties to be involved in making an event into a business transaction. It signals the intangible effect of transactions. A qualitative change occurs when no change takes place in a company’s assets and liabilities but the financial situation of a company changes. A quantitative change occurs when there is a change in the assets or liabilities of the company. This effect can be seen in two ways: qualitative and quantitative. The event must affect the financials of the company. These features are as follows: Financial Value In order for an economic event to be classified as a business transaction, it needs to have certain key features. Some business transaction examples are: selling machines to a company for credit or cash, paying wages to an employee, and giving a loan as a financial institution. When analysed and compared, these accounts can give us a good idea about how financially sound a company is.
Most companies usually have five different accounts to record all business transactions accurately: They are always recorded in a certain account. These events must always be measurable in monetary terms so that the company can record them for accounting purposes. A Business Transaction is an economic event involving the movement of money, goods, or services, usually between two or more parties.
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