Before knowing what a business transaction is, one must first understand what a transaction is. A transaction is the recording of exchanging products, services, or cash for business or non-commercial reasons. Business transactions are becoming increasingly significant because they give an abstract perspective of the interactions across firms to attain a business goal. Business transactions are technically the foundation of business growth and its future. Without much delay, let's get into the details.
Did you know? A business transaction can occur between two parties working toward common goals or between a company and a client, such as a retailer and a customer who buys something in the store.
What is Business Transaction?
So, to begin with, here is the business transaction definition. A financial interchange of commodities, cash, or services among two or more people is referred to as a business transaction. A commercial exchange should have a quantifiable cash value to consider it as a transaction for books of accounts. Business dealings will have an impact on a company's finances. Business transactions can be as complicated as the longer operating service agreement or as straightforward as a cash payment.
A commercial transaction might occur between two entities working toward common goals or between a company and a client, like a retailer and a client who buys something in the shop.
What is Not a Business Transaction?
Some activities that take place regularly in a company really aren't regarded as commercial transactions. It is not a business transaction when there is no method to document the activity for accounting reasons. Many companies use pro forma templates or pro forma financial statements to track their financial activities and project their future cash flow.
Also Read: 3 Golden Rules of Accounting - Golden Rules of Accounts Explained with Examples
Types of Business Transactions
Accounting distinguishes between two types of business transactions:
Cash Transaction and Credit Transaction
Cash Transaction: Cash transactions are when the company makes the payment or receives money when the deal takes place. A cash transaction occurred between Maria and the retailer, for instance, if Maria buys a new blouse from the shop and pays the amount at the register. If she pays the amount through debit or credit cards, you will refer to it as a cash transaction since she made the payment immediately when the transaction took place.
Credit Transaction: In a credit transaction, they pay the bill only after the credit period, which is a predetermined length of time. Marie, for instance, wishes to buy a mattress from a mattress shop. The shop offers one month for payment rather than requiring payment at the moment of the purchase. There is no exchange of money at the moment of the purchase, but Maria will have to make payment for the mattress once the 1-month credit period is up.
Also Read: Costing: Definition, Objectives, and Advantages
Internal Transaction and External Transaction
Internal Transaction: An internal transaction takes place when there’s no involvement from an outside entity. Despite the absence of a value transaction with a 3rd party, a pecuniary transaction that occurs will have an impact on the bookkeeping for the firm. Two examples of internal transactions include degradation of a fixed property and asset losses.
External Transaction: Exchange transactions, also known as external transactions, occur when multiple parties participate in the trade. These activities typically occur daily, including buying items, rental payments or electricity, or paying staff.
Business Transaction Examples
A firm engages in a number of transactions each day that have an impact on its accounting. Typical commercial transactions include, for example:
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Borrowing Money From A Bank:
A company engages in a commercial transaction with the banks whenever it enters into a loan contract to borrow money from banks. The borrowing will impact the company's asset and liabilities accounts.
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Purchasing Goods From A Vendor:
When a business buys something from a supplier, there is an involvement of just those two parties in the transaction. This transaction business can record under the vendor account and a purchasing account. Additionally, they also have to record the purchases in the company's stock.
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Paying Rent And Other Utilities:
A business completes transactions whenever it completes rental payments, electricity, water, or broadband costs. The expenses of the business will reflect in the accounts.
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Sale Of Goods:
A corporation enters into a business transaction with the buyer if it sells a product. They register the transactions in the financial and asset records. The company usually uses sales contracts to formalise the deal.
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Paying Interest:
Another type of commercial deal is interest expense, which impacts the company's assets and expenditure accounts. It refers to the interest due on all borrowings, including bonds, loans, convertible debt, and credit lines.
Also Read: What is an Accounting Transaction? Example & Types of Accounting Transaction
Features of a Business Transaction
The exchange should include these essential elements to be regarded as a commercial transaction:
- The deal must be financially beneficial.
- The transaction requires the participation of two parties who make the deal on behalf of the company but not for a person's personal benefit.
- An original document supports the transaction (a bill, sales order, receipt, etc.)
The likelihood that a transaction isn't really a business transaction increases if the company cannot document it in a company account.
The company's financial condition must alter due to business transactions. Either a quantitative alteration or a qualitative shift may take place in this.
Quantitative Change:
Whenever the asset and liability values of the company change, there is a quantitative change. For instance, when a fire damages ₹20,000 worth of machinery, it lowers the firm's asset worth. Since the company can document the loss for books of accounts, this transaction qualifies as a business one.
Qualitative Change:
When several components of assets or debts change, there is a qualitative change. For instance, the corporation spent ₹20,000 on buying new equipment because the current machine was damaged due to a fire. The business incurs a ₹20,000 deficit yet acquires a ₹20,000 piece of machinery. This is a business transaction since the financial condition of the firm changes; however, the worth of the assets doesn't.
Importance Of Business Transaction
Business transactions are regular transactions that might occur annually or more frequently. If there isn't a deal, the organisation isn't functioning and will quickly shut down. Therefore, completing these transactions suggests that the business is active.
Transactions and the institution's growth or decline are further factors. A small number of transactions indicate that an organisation is functioning, whereas many transactions indicate that the organisation is expanding. Therefore, these transactions, which might relate to more competitive market practices and business engagement with the surrounding environments of the firm, maintain the firm in operation and growing continually.
Steps in a Business Transaction
The company must record and examine the business transaction after placing it in its accounts. The accounting process consists of the following 5 steps:
- Step 1: Examine and document each transaction as it happens.
- Step 2: Record the transactions in the accounting records (debits and crediting).
- Step 3: Use a trial balance to alter the assets.
- Step 4: Make financial statements.
- Step 5: Close provisional accounts.
Conclusion:
Business transactions are agreements the assessee makes with the 3rd party for a commercial purpose, evaluates money, and documents in the assessee's accounting records. The documentation of the events, which provides adequate justification for the transactions, is necessary to enter these exchanges into the assessee's accounting records. The assessor can analyse his net profit independently of other sources of income thanks to business transaction records. The division enables the taxpayer to timely submit his tax returns in accordance with statutory requirements.
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