Accounting Transactions

Transactions that affect the financial status and financial statements of a business

What are Accounting Transactions?

Accounting transactions refer to any business activity that results in a direct effect on the financial status and financial statements of the business. Such transactions come in many forms, including:

  • Sales in cash and credit to customers
  • Receipt of cash from a customer by sending an invoice
  • Purchase of fixed assets and movable assets
  • Borrowing funds from a creditor
  • Paying off borrowed funds from a creditor
  • Payment of cash to a supplier from a sent invoice

 

Accounting Transactions

 

It is imperative to remember that every transaction should show the balance between the assets and the liabilities, or the debit and the credit, such that a receipt of cash from a customer equals an increase in revenue or that a purchase from a supplier equals an increase in expenses and a decrease in cash.

 

Types of Accounting Transactions based on Institutional Relationship

The types of accounting transactions may be based on various points of view. The first one that we will discuss is the types of accounting transactions according to institutional relationships, namely external and internal transactions.

 

1. External transactions

These involve the trading of goods and services with money. Therefore, it can be said that any transaction that is entered into by two persons or two organizations with one buying and the other one selling is considered an external transaction. It is also called a business transaction.

Example: If Company A buys raw materials for its production from Company B, then this is called an external transaction.

 

2. Internal transactions

They don’t involve any sales but rather other processes within the organization. This may include computing the salary of the employees and estimating the depreciation value of a certain asset.

 

Types of Accounting Transactions based on the Exchange of Cash

Based on the exchange of cash, there are three types of accounting transactions, namely cash transactions, non-cash transactions, and credit transactions.

 

1. Cash transactions

They are the most common forms of transactions, which refer to those that are dealt with cash. For example, if a company purchases office supplies and pays for them with cash, a debit card, or a check, then that is a cash transaction.

 

2. Non-cash transactions

They are unrelated to transactions that specify if cash’s been paid or if it will be paid in the future. For example, if Company A purchases a machine from Company B and sees that it is defective, returning it will not entail any cash spent, so it falls under non-cash transactions. In other words, transactions that are not cash or credit are non-cash transactions.

 

3. Credit transactions

They are deferred cash transactions because payment is promised and completed at a future date. Companies often extend credit terms for payment, such as 30 days, 60 days, or 90 days, depending on the product or service being sold or industry norms.

 

Types of Accounting Transactions based on Objective

There are two types of accounting transactions based on objective, namely business or non-business.

 

1. Business transactions

These are everyday transactions that keep the business running, such as sales and purchases, rent for office space, advertisements, and other expenses.

 

2. Non-business transactions

These are transactions that don’t involve a sale or purchase but may involve donations and social responsibility.

 

3. Personal transactions

Personal transactions are those that are performed for personal purposes such as birthday expenditures.

 

Double-entry Bookkeeping of Accounting Transactions

When recording accounting transactions, the double-entry method is a system bookkeeping where every entry to an account requires an opposite entry to a different account producing balanced journal entries. The double-sided journal entry comprises two equal and corresponding sides, known as a debit (left) and a credit (right). It will ensure that total debits will always equal total credits.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Financial Accounting Theory
  • Journal Entries Guide
  • Projecting Balance Sheet Line Items
  • Projecting Income Statement Line Items

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