Business transaction and its classification
A transaction (also termed as business transaction and financial transaction) may be defined as an exchange of value. In a business environment, it is an exchange of goods or services at a particular price. Every transaction changes the financial position of a business and therefore must be recorded in the books of accounts.
Examples of transaction include payment of salary of $1,000 to a worker, purchases of merchandise from a supplier on credit or purchase of machinery for cash.
Classification/types of business transaction
Business transactions may be classified as:
- cash and credit transactions
- internal and external transactions
A brief explanation and examples of each type are given below:
When cash is paid or received immediately at the time when transaction occurs, the transaction is called a cash transaction. It is important to note that where a payment is made using a credit card or a check, such transaction would also be considered as cash transaction.
Examples of cash transactions include purchase of furniture for cash, sale of merchandise for cash, payment to a creditor by check etc.
When the payment or receipt of cash is not made immediately at the time when transaction occurs but postponed to a future date, the transaction is said to be a credit transaction.
When there is no question of meeting the value of a transaction, it is called a paper transaction. For Example, Goods or cash lost.
A transaction that is not directly related to an outsider or an external party is called internal transaction. Examples of internal transactions include recording depreciation of a fixed asset, recording a loss of merchandise by fire, provision of goods and services to another department of same business etc.
A transaction in which an outsider or external party is involved is known as external transaction. For example, purchase of merchandise from a supplier, payment of cash to a creditor, payment of salary to a worker etc. Usually, most of the transactions made by a business during an accounting period are external transactions.