What is a Business Transaction: Meaning, Types, Features & Examples
A business transaction is an event that involves a financial transaction between different parties. Typically, this is a reciprocation against goods or services. Such transactions can either be a simple cash purchase or in the form of a contract.
If you want to learn more about business transactions, continue reading.
What is a Business Transaction?
In practical terms, a business transaction is an economic event that involves a third party for a financial transaction. In firms with regular high-volume business transactions, they maintain a special journal. Like a sales journal or purchase journal.
Later these journals are periodically aggregated into a general ledger. In comparison, lower volume transactions are directly put in the general ledger. Nevertheless, the event must match certain features to establish itself as a business transaction.
What Are the Features of Business Transactions?
Here are the main features of a business transaction:
- Every business transaction should have a financial value.
- In a business transaction, it is necessary to involve two parties.
- These transactions are for a business entity and not for personal purposes.
- A source document like an invoice, receipt, or sales order must support such transactions.
What Are the Types of Business Transactions?
There are two ways to classify the different types of business transactions: cash or credit transactions and internal or external transactions.
1. Cash or Credit Transactions
Some of the cash and credit transactions are as follows:
- Cash Transaction: As the name suggests, in this kind of transaction, the payment is received or paid in cash. This is the most common way of transactions that has developed over the ages. For example, buying a jacket and paying in cash at the checkout, the transaction here is called a cash transaction, which is between a customer and the store. Although we use "cash" here, the payment can be made via a debit or credit card. It is called a "cash transaction" because the payment is made at the time of the transaction.
- Credit Transaction: In contrast to cash transactions, payment in a credit transaction is made after a certain period. Therefore, the time one takes to repay the credit is called a credit period. Here is an example to understand this better. You want to buy a television, but instead of paying for that television immediately at checkout, the store allows a 30 days credit period. Within this time frame, you can pay the store the required amount.
2. Internal or External Transactions
Some internal and external transactions are as follows:
- Internal Transaction: When a business transaction is carried out within an organisation instead of involving any third parties, it is called an internal transaction. Generally, it is an exchange of finances between departments or within a company and its employees. Like sales and other external transactions, internal transactions also affect a company's finances. Examples of such transactions are the distribution of salaries, one department offering office supplies to another, etc.
- External Transaction: External or exchange transactions occur when two or more parties are involved. Such an event occurs in every kind of trade, whether for goods or services for money. This transaction can occur between two individuals or companies, a person and a firm. For instance, a customer buys a book from a store, or a business purchases raw materials from a supplier; all these fall under external exchange.
What Are Some Examples of Business Transactions?
Business organisations participate in multiple business transactions, each affecting the business in a certain way. Some examples of business transactions are as follows:
- Taking a Loan: A company borrowing money from a bank through a loan agreement is a business transaction between the company and a bank. This loan will affect a business's assets and liability account.
- Purchasing From a Vendor: When a company purchases anything from a vendor, it establishes a business relationship between them. Therefore, the company can record the transaction between them and the vendor in their purchase account.
- Paying for Utilities: Other business transactions a company participates in include paying rent for the office space, electricity, water, and internet bills. They record these payments under assets and expense accounts.
- Goods Sale: A company establishes a business relationship with their purchaser upon selling products or services. In scenarios like this, sales agreements are used for documenting such transactions. Nevertheless, any sale a company makes falls under the category of assets and income accounts.
- Paying Interest: Another form of business transaction can be paying off interest. Again, this affects the assets and expense accounts of a business.
- Day-to-Day Business Transactions: In addition to these examples, here are some day-to-day business transactions that a company goes through:
- Paying wages to employees
- Buying a fixed asset
- Selling shares to an investor
- Paying taxes
- Purchasing insurance
- Repaying a loan
Business Transaction Vs. Investment Transaction
Both business and investment requires one to commit funds to get future benefits or profit. While business transaction refers to the economic activity which involves exchange of money, goods or services between two parties. Investment transactions, on the other hand, take place during the sale or purchase of an asset. It shows one’s interaction with assets.
Business transaction is evaluated in terms of monetary value and is recorded in the accounting system of a business.
Investment transactions can be categorised into two types: opening and closing. Open transaction refers to the scenario when you purchase an asset. Selling an asset refers to a close transaction which will enable you to evaluate the profits or loss.
What Is the Importance of Recording Business Transactions?
Maintaining regular records of business transactions is important because it helps in every legal purpose and prevents disputes. However, there are other points of importance one should consider. In the following section, we have discussed them briefly.
Spending and Charging
Recording a company's business transactions ensures they charge accurately from their client and vice versa. Every company has certain fixed payments to make every month. Hence it is necessary to monitor the expected costs not to exceed.
However, it is essential to ensure the transactions are recorded correctly and there is no miscommunication. This applies to both small and large companies. Charging accurate amounts from your customers is essential as it holds the chances of making or breaking a business. Moreover, constant recording of business transactions is necessary to keep a company's expenditure low.
Legal Record Keeping
By regularly recording business transactions, a business owner can save massively on legal fronts, like tax returns. But unfortunately, some feel it is only necessary to record those needed transactions.
It is thus advisable to keep the tax records for at least five years. Therefore, maintaining business transactions becomes crucial. Moreover, in case of any legal problems in the future, you can use previously recorded transactions as proof.
Another importance of recording any business transaction is that it helps manage costs. As there is regular monitoring of costs, companies can check for ways to increase profits.
For instance, lowering costs and ensuring paying the correct amount on time. By avoiding cancellations and inaccuracy in cash flow, one can increase profitability. In addition, recording transactions allows for maintaining deadlines, which means there are fewer chances of making errors and paying unnecessary penalties.
This article talked about business transactions, their types, features and importance. To conclude, a business transaction is a financial event requiring two parties' involvement. Thus, everything is a business transaction, from buying health insurance to selling handmade goods to a customer.