Accounting Transactions: Definition, Types & Examples
Accounting is the backbone of any business. At the basis of accounting are transactions. Understanding accounting transactions is a must for any business owner. Having knowledge of the way money can flow into or out of your business is crucial to many business activities. Are you getting more involved with your business’s accounting? Keep reading to learn all about accounting transactions!
Here’s What We’ll Cover:
What Is an Accounting Transaction?
An accounting transaction refers to any business activity that affects finances. When something affects finances, it has to be recorded through an accounting transaction. This information is then made available one the financial reports. These reports are sometimes known as accounting reports. Financial reporting is essential for any business. It lets the organization keep track of how it is doing financially.
The information that is recorded in an accounting transaction is known as a journal entry. Journal entries record specific information pertaining to each transaction. Then, the journal entry lines appear in the general ledger, as well as on financial statements. The creation of journal entries must happen every time a transaction takes place in a business.
Examples of Accounting Transactions
Accounting transactions can result from any number of different business activities. Some of the most common ones are listed below:
- Credit sales and cash from purchases
- Receipt of cash from invoices
- The purchase of assets
- Payments on loans payable to a creditor
- Receiving money from a creditor
- Cash payments to suppliers
As you can see, there are many reasons for your business to be using accounting transactions!
Types of Accounting Transactions: Relationship-Based
When you’re looking at your accounting transactions, you can classify them based on relationship. This basis is looking at the flow of money. Specifically, it takes into account whether or not money is being used out of the company, or within it.
Internal transactions have to do with money being moved within a company itself. Internal transaction activity tends to come from a few sources. The two most common are paying wages, and the depreciation of assets. These activities only require money to move within the organization itself.
External transactions have to do with money flowing to or from external parties. For example, if your company purchases supplies from another company, you’ve just done an external transaction. Money is being taken from your business and is being sent to an external entity. The same can be said of sales. The majority of accounting transactions have to do with external sources. As such, your books will probably have more external than internal transactions.
Types of Accounting Transactions: Exchange-Based
Not all purchases or sales are made using the same payment method. As such, you can also view your accounting transactions based on a cash basis. This refers to how cash is being exchanged, of course. These exchange-based transactions occur in one of three ways, all of which are listed below.
Cash transactions are the most common type of accounting transaction for most businesses. When a company makes purchases with cash, debit card, or check, they’re making a cash transaction. It’s rare to see a business purchase office supplies on credit from a supplier, after all.
Non-cash transactions are not the same as credit transactions. Rather, they have to do with transactions like returns. For example, if a customer purchases an item, but returns it due to a defect, no cash is changing hands. This is a non-cash transaction.
Credit transactions have to do with a promise to pay. When goods or services exchange hands on credit, no cash payment is made. Rather, the entity receiving the goods or services promises to pay at a later date. They’ve received their supplies based on credit. Often, these transactions come with applicable eligibility requirements. They also come with time requirements for payment.
Types of Accounting Transactions: Objective-Based
The last way to look at accounting transactions is by reviewing the objective of the transaction itself. These are easy to identify, and can be split into three distinct categories.
Business transactions relate directly to business operations. These are the purchases and sales that occur in daily activity for a business. All accounting records have to do with business transactions. The daily operations of a business are what keep it running. Examples include sales, purchases, rent, utilities, advertising, et cetera. These are all viable business transactions.
These are transactions that don’t relate to business operations. They are the transactions your business makes regarding donations, or social responsibility. These are normally consistent with charitable donations, scholarships, and sponsorships. Not all businesses have these, just starting out. They tend to belong to larger companies, or established small businesses.
Personal transactions still exist within the realm of business. These are the purchases that your business makes that aren’t business expenses, but they’re related to your business. Examples of these are purchases that give back to employees, like birthday or anniversary parties.
How Are Transactions Recorded?
Often, businesses choose to record these transactions using the double-entry accounting method. This lets a business keep eyes on where money is coming from and where it is going in each journal entry. The entire basis of double-entry accounting is to keep balanced books. Each journal entry contains both a credit and a debit. Both are labeled accordingly, which is dependent upon the individual transaction.
Is your business using the double-entry method? It should be. This method ensures that your business’s finances are always balanced. If you’re looking for a new accounting software, be sure to pick one that fits your business best. Be sure to choose one with double-entry capability, too. It’ll make your financial life easier.
There are many different types of accounting transactions. How you classify them depends on the way that you’re looking at them. All transactions can be given more than one type, depending on your view. If you’re looking for more accounting information like this, check out our resource hub! It has plenty of helpful articles just like this one.