Meaning of Business Transaction
Business transaction refer to the event of business which is measurable in money terms and recorded in book of accounts. These transactions are also termed as financial transaction as they influence the financial position of business enterprise. Business transaction occurs between 2 or more parties involving interchange of goods, services and money. They can be as brief as cash purchases or even long lasting like service contract extending over years.
Every business event is not treated as business transaction but all transactions of business are event. A business transaction may either be an exchange transaction involving physical exchange of values or a non-exchange transaction where there is no physical exchange. All these transactions are recorded in book of accounts by accountant via passing a journal entry and are supported by one or more source documents. They have a two-fold effect on elements of accounting that means for every value received, an equal amount of value is given. Assets, liabilities and capital are such accounting elements which changes whenever a business transaction takes place.
Types of Business Transaction
There are basically two types of business transactions which are listed below: –
- Cash and credit transactions
- Internal and External transactions
Cash and credit transactions
Cash transaction are those transactions in which there is interchange of cash. Here, cash is either paid or received immediately at the time when transaction takes place. For example, you are buying a mobile phone from mobile shop and you immediately do a payment of Rs. 12000. This transaction is a cash transaction as here money is paid immediately by you in order to purchase the mobile phone.
Credit transaction do not involve the immediate interchange of cash among parties entering into a transaction. The cash is paid or received at some future date. All such transactions that do not change hands immediately are called as credit transactions. For example, you buy a laptop on credit where you are not making the payment for price of laptop instantly but will do at some future date. You are taking the possession of good without doing payment for them, this transaction is a credit transaction.
Internal and external transactions
Internal transaction are transactions which do not involve any external parties nor any exchange of value between them. Such transactions are measurable in money terms and influences the financial status of business. For example, the loss of assets caused by fire.
External transactions are one in which there is exchange of value by business with external parties. Every transaction other than the internal transactions are termed as external transactions. This transaction includes paying rent to owner, buying materials from supplier, selling goods to clients etc.
Features of Business Transaction
Various features of business transactions are as explained in points below:
- Measurable in money terms: Business transactions are measurable in monetary terms and influences the financial state of business. All those business events which do not have any monetary value are not termed as transaction.
- There must be two parties: A business transaction involves two parties in between for settling it. No transaction is possible in absence of two parties. There is always one giver and one receiver in the transaction.
- Transfer of property or service: The business transaction results in transfer of property or a service from one person to another person. When we buy a mobile from shopkeeper for 10000, it results in transfer of property (mobile phone) from shopkeeper to us.
- Has dual aspect: Business transactions have dual aspect on elements of accounting. There is an equal amount value given for each value received.
- Changes financial position of business: These have impact over the financial position of business enterprise. Business transaction bring two types of changes in financial position which are quantitative changes and qualitative changes.
- Supported by documents: Every transaction is entered in to book of account on the basis of legitimate and authorized documents specifying the business event. All these documents are treated as legal evidences which support the business deals taking place.
- Entered for entity: Business transaction only includes those transactions which are entered for the entity itself. Any transaction concerned with the individual purpose of proprietor is not considered a business transaction.
Examples of Business Transaction
Different examples of business transaction are as follows: –
- Buying goods on credit basis from vendor: Two accounts will be affected by this business transaction; one is purchase account and another one is vendor account (liability). It also influences the inventory as the inventory stock (assets) will rise.
- Electricity and rent payment of office premises: Cash/Bank account (asset) and, rent and electricity account (liability) are affected by this business transaction.
- Borrowing from bank: It affects two accounts: loan account (liability) and cash/bank account (asset).
- Payment of Interest: This business transaction will affect interest account (expense) as well as the cash/bank account (assets).