Business transaction definition

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What is a Business Transaction?

A business transaction is an economic event with a third party that is recorded in an organization's accounting system. Such a transaction must be measurable in money. Once a business transaction has been recorded, it will flow through the accounting system and appear in a firm’s financial statements.

Examples of Business Transactions

Several examples of business transactions are as follows:

Sales Transactions

  • Selling goods to a customer for cash. This results in the receipt of cash and the transfer of goods to the customer, along with the recognition of revenue and a related cost of goods sold.

  • Selling goods to a customer on credit. This results in the creation of an invoice and the transfer of goods to the customer, along with the recognition of revenue and a related cost of goods sold.

Purchase Transactions

  • Buying insurance from an insurer. This results in an expenditure of cash or an account payable, and the creation of a prepaid expense, which is an asset.

  • Buying inventory from a supplier. This results in the expenditure of cash or an account payable, and the receipt of inventory or merchandise from the supplier.

Payment Transactions

  • Paying wages to employees. This results in the payment of cash to employees and the recognition of expenses for compensation and payroll taxes.

  • Paying taxes to a government entity. This results in the payment of cash to government entity and the recognition of an expense. An example is the payment of income taxes.

Receipt Transactions

  • Obtaining a loan from a lender. This results in the receipt of cash and the recognition of an obligation to pay back the money.

  • Selling shares to an investor. This results in the receipt of cash and the recordation of stock ownership by the investor.

Related Course

Accountants’ Guidebook

Bookkeeping Guidebook

Recordation of Business Transactions

High-volume business transactions may be recorded in a special journal, such as the purchases journal or sales journal. Once business transactions are entered into these journals, they are periodically aggregated and posted to the general ledger. Lower-volume transactions are posted directly to the general ledger. These transactions are eventually summarized into the firm's financial statements.

FAQs

What is the difference between internal and external transactions?

Internal transactions occur within a business and do not involve outside parties, such as recording depreciation or allocating overhead costs. External transactions involve exchanges between the business and external entities, like customers, suppliers, or lenders. While internal transactions affect internal records and management decisions, external transactions typically involve cash flow and legal obligations.

Which Events are Not Considered to be Business Transactions?

Events that do not involve a measurable financial impact are not considered business transactions. Examples include signing a contract without exchanging goods or money, hiring an employee before wages are paid, or receiving a customer inquiry. These events may be important operationally but are not recorded in the accounting system until they result in a financial exchange.

What Documents Support a Business Transaction?

Business transactions are supported by source documents that provide evidence of the financial exchange. Common documents include invoices, receipts, purchase orders, sales contracts, bank statements, and shipping documents. These records ensure accuracy in accounting, support audit trails, and serve as proof for regulatory or legal purposes.