Business transaction definition
/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
Examples of business transactions are:
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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.
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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.
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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.
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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.
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Paying wages to employees. This results in the payment of cash to employees and the recognition of expenses for compensation and payroll taxes.
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Obtaining a loan from a lender . This results in the receipt of cash and the recognition of an obligation to pay back the money.
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Selling shares to an investor . This results in the receipt of cash and the recordation of stock ownership by the investor.
Related Course
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 .
Source Documents
A business transaction should always be supported by a source document . For example, the purchase of inventory from a supplier could be supported by a purchase order , while the payment of wages to an employee could be supported by a timesheet .
Events Not Considered Business Transactions
Some events are not considered business transactions, such as giving a reporter a tour of company facilities, since there is no tangible value associated with the event.
