Businesses engage in the exchange of different goods and services. The payment can be immediate or at a later date depending on the policy of the business. The major types of business transactions are credit and cash.
LEARNING OBJECTIVES
By the end of this topic, you should be able to;
- Explain the meaning of business transactions
- Discuss the types of business transactions
TYPES OF BUSINESS TRANSACTIONS
An accounting system must record all business transactions in order to ensure complete and reliable information when the financial statements are prepared.
A business transaction refers to an event or activity that can be measured in terms of money and which affects the financial position or operations of the business entity. A business transaction has an effect on any of the accounting elements; assets, liabilities, expense, capital, and income.
Transactions can be classified as exchange and non-exchange.
- Exchange transactions involve physical exchange like selling, purchasing, payment of accounts and collection of receivables.
- Non-exchange transactions are events that do not involve physical exchanges but where changes in monetary values are determinable like wear and tear of equipment, typhoon loss, and fire loss.
To qualify as an accountable/recordable business transaction, the activity or event must:
- Be a transaction involving the business entity. If Mrs. Bright, owner of Bright Productions, buys a car for personal use using her own money, it will not be reflected in the books of the company. This is because it does not have anything to do with the business. If the company buys a delivery truck, then that would be a business transaction of the company. Always remember that a business is treated as an individual entity, separate and different from its owners.
- Be of a financial character. Transactions must involve monetary values. This means that a certain amount of money must be assigned to the elements or accounts affected. For example, Bright productions render video coverage services and expect to collect 10 000 dollars after 5 days. In such a case, it is explicit. The income and receivable can be measured reliably at 10,000 dollars. There should be an actual sale or performance of service first to give the company a right over the income or revenue.
- Have a dual effect on the accounting elements. Every transaction has a two-fold effect. For every value received, there is a value given; or for every debit, there is a credit. This is the concept of double-entry accounting. For example, Bright productions bought tables and chairs for 6 000 dollars. The company received tables and chairs thereby increasing its assets (increase in office equipment). In return, the company paid cash; therefore, there is an equal decrease in assets (decrease in cash).
- Be supported by a source document. As part of good accounting and internal control practice, business transactions must be supported by source documents. The source documents serve as bases in recording transactions in the journal. Examples of source documents are official receipt issued whenever cash is received, sales invoice for sales transactions, cash voucher for payment in cash, statement of account from suppliers, vendor’s invoice, promissory notes, and other business documents.
