What is a Transaction?

A transaction is a business event that has a monetary impact on an entity's financial statements, and is recorded as an entry in its accounting records. A larger business will have thousands of transactions, all of which must be recorded in its accounting system. The system is then used to summarize these transactions into a set of financial statements, which are produced following the end of each reporting period.

Accounting for a Transaction

A high-volume transaction, such as a billing to a customer, may be recorded in a specialized journal, which is then summarized and posted to the general ledger. Alternatively, lower-volume transactions are posted directly to the general ledger.

When the cash basis of accounting is being used, a transaction is recorded when cash is spent or received. Alternatively, under the accrual basis of accounting, a transaction is recorded when revenue is realized or when an expense is incurred, irrespective of the flow of cash.

Examples of Transactions

Examples of transactions are as follows:

Paying a supplier for services rendered or goods delivered.
Paying a seller with cash and a note in order to obtain ownership of a property formerly owned by the seller.
Paying an employee for hours worked.
Receiving payment from a customer in exchange for goods or services delivered.