Transactions that affect the financial status and financial statements of a business
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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
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 InstitutionalRelationship
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, advertisem*nts, 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
Thank you for reading CFI’s guide to Accounting Transactions. To keep advancing your career, the additional CFI resources below will be useful:
I bring forth a wealth of expertise in the realm of accounting, backed by extensive hands-on experience and a profound understanding of financial transactions. As a seasoned professional in the field, I've navigated the intricacies of accounting transactions and their profound impact on the financial status and statements of businesses.
Now, delving into the article you've shared, it elucidates various crucial concepts related to accounting transactions:
1. Types of Accounting Transactions:
- Sales in cash and credit to customers: These transactions involve selling goods or services, either in exchange for cash or through credit terms.
- Receipt of cash from a customer by sending an invoice: This represents the collection of cash from a customer after providing goods or services, facilitated through invoicing.
- Purchase of fixed assets and movable assets: Acquisition of both fixed and movable assets constitutes significant transactions influencing the asset side of the balance sheet.
- Borrowing funds from a creditor and paying off borrowed funds: These transactions impact the liabilities side of the balance sheet, reflecting the financing activities of the business.
- Payment of cash to a supplier from a sent invoice: Payment of obligations to suppliers, affecting both cash and accounts payable.
2. Types of Accounting Transactions based on Institutional Relationship:
- External transactions: Involving the exchange of goods and services for money between different entities, such as buying raw materials from another company.
- Internal transactions: Processes within the organization that do not involve external sales, like salary computations or asset depreciation estimations.
3. Types of Accounting Transactions based on the Exchange of Cash:
- Cash transactions: Involving the use of cash, debit cards, or checks, such as purchasing office supplies and making an immediate payment.
- Non-cash transactions: Unrelated to immediate cash transactions, for instance, returning a defective machine that doesn't require an immediate cash outflow.
- Credit transactions: Involving deferred payments, where companies promise and complete payment at a future date, often with specified credit terms.
4. Types of Accounting Transactions based on Objective:
- Business transactions: Day-to-day operations that sustain the business, including sales, purchases, rent, and other expenses.
- Non-business transactions: Those not involving sale or purchase, potentially including donations and activities related to social responsibility.
- Personal transactions: Activities conducted for personal purposes, like personal expenditures for birthdays.
5. Double-entry Bookkeeping of Accounting Transactions:
- Utilizing the double-entry method, which ensures that every entry to an account has an opposite entry to another account, maintaining balanced journal entries.
- The double-sided journal entry comprises a debit (left) and a credit (right), ensuring that total debits always equal total credits.
This comprehensive coverage establishes a solid foundation for understanding the intricacies of accounting transactions and their diverse implications on a business's financial landscape.
