Transactions that affect the financial status and financial statements of a business
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Accounting transactions refer to any business activity that results in a direct effect on the financial status and financial statements of the business. Such transactions come in many forms, including:
- Sales in cash and credit to customers
- Receipt of cash from a customer by sending an invoice
- Purchase of fixed assets and movable assets
- Borrowing funds from a creditor
- Paying off borrowed funds from a creditor
- Payment of cash to a supplier from a sent invoice
It is imperative to remember that every transaction should show the balance between the assets and the liabilities, or the debit and the credit, such that a receipt of cash from a customer equals an increase in revenue or that a purchase from a supplier equals an increase in expenses and a decrease in cash.
Types of Accounting Transactions based on InstitutionalRelationship
The types of accounting transactions may be based on various points of view. The first one that we will discuss is the types of accounting transactions according to institutional relationships, namely external and internal transactions.
1. External transactions
These involve the trading of goods and services with money. Therefore, it can be said that any transaction that is entered into by two persons or two organizations with one buying and the other one selling is considered an external transaction. It is also called a business transaction.
Example: If Company A buys raw materials for its production from Company B, then this is called an external transaction.
2. Internal transactions
They don’t involve any sales but rather other processes within the organization. This may include computing the salary of the employees and estimating the depreciation value of a certain asset.
Types of Accounting Transactions based on the Exchange of Cash
Based on the exchange of cash, there are three types of accounting transactions, namely cash transactions, non-cash transactions, and credit transactions.
1. Cash transactions
They are the most common forms of transactions, which refer to those that are dealt with cash. For example, if a company purchases office supplies and pays for them with cash, a debit card, or a check, then that is a cash transaction.
2. Non-cash transactions
They are unrelated to transactions that specify if cash’s been paid or if it will be paid in the future. For example, if Company A purchases a machine from Company B and sees that it is defective, returning it will not entail any cash spent, so it falls under non-cash transactions. In other words, transactions that are not cash or credit are non-cash transactions.
3. Credit transactions
They are deferred cash transactions because payment is promised and completed at a future date. Companies often extend credit terms for payment, such as 30 days, 60 days, or 90 days, depending on the product or service being sold or industry norms.
Types of Accounting Transactions based on Objective
There are two types of accounting transactions based on objective, namely business or non-business.
1. Business transactions
These are everyday transactions that keep the business running, such as sales and purchases, rent for office space, advertisem*nts, and other expenses.
2. Non-business transactions
These are transactions that don’t involve a sale or purchase but may involve donations and social responsibility.
3. Personal transactions
Personal transactions are those that are performed for personal purposes such as birthday expenditures.
Double-entry Bookkeeping of Accounting Transactions
When recording accounting transactions, the double-entry method is a system bookkeeping where every entry to an account requires an opposite entry to a different account producing balanced journal entries. The double-sided journal entry comprises two equal and corresponding sides, known as a debit (left) and a credit (right). It will ensure that total debits will always equal total credits.
Related Readings
Thank you for reading CFI’s guide to Accounting Transactions. To keep advancing your career, the additional CFI resources below will be useful:
- Financial Accounting Theory
- Journal Entries Guide
- Projecting Balance Sheet Line Items
- Projecting Income Statement Line Items
- T-Account Template
- See all accounting resources
FAQs
Accounting transactions are any business activities that affect the company's financial statements and status. Essentially, any exchange of money is an accounting transaction. Companies document these transactions in a number of ways, such as spreadsheets or invoices, to keep track of their finances.
What are the 4 accounting transactions? ›
There are four categories that a transaction can be categorized as: sales, purchases, receipts, and payments. Each of them involves money in some way and is recorded in your books in two locations.
What are the 4 transactions? ›
There are four main types of financial transactions that occur in a business. These four types of financial transactions are sales, purchases, receipts, and payments.
How many accounting transactions are there? ›
Based on the exchange of cash, there are three types of accounting transactions, namely cash transactions, non-cash transactions, and credit transactions.
What are the internal and external transactions? ›
Internal and external transactions
Most transactions are external, meaning they take place between the company and third parties such as customers and suppliers. However, some transactions are internal such as the exchange of assets between departments or locations, or the payment of employees.
What are the golden rules of accounting? ›
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.
What transactions do accountants have to track? ›
The Basics of Accounting Transactions
These transactions can be sales, purchases, expenses, or even loans. As a business owner, recognizing the significance of each type helps you make informed financial decisions. All of these transactions play a key role in the story of your business's financial health.
What are the four basic accounting transaction cycles? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation.
What are the four basic transactions? ›
The four types of financial transactions are purchases, sales, payments, and receipts. Businesses use the accrual or cash method of accounting to record such transactions. Financial transactions in accounting are always bidirectional, unlike non-financial transactions.
How to classify transactions in accounting? ›
Here are the most common types of account transactions:
- External transactions. ...
- Internal transactions. ...
- Cash transactions. ...
- Non-cash transactions. ...
- Credit transactions. ...
- Business transactions. ...
- Non-business transactions. ...
- Personal transactions.
Full cycle accounting refers to the complete set of activities undertaken by an accountant to record all business transactions during an accounting period and includes everything from the initial recording of a business transaction (the start of the cycle) to the preparation of the financial statements (the end of the ...
What are the 5 basic accounts? ›
5 types of accounts in accounting
- Assets. Asset accounts usually include the tangible and intangible items your company owns. ...
- Expenses. An expense account can include the products or services a company purchases to help generate additional income. ...
- Income. ...
- Liabilities. ...
- Equity.
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What are examples of internal transactions? ›
An internal transaction involves the exchange of assets and funds within the business. For instance, the payment of employees is an internal transaction because funds are paid to an individual within the company in exchange for their labor.
What is a cash transaction? ›
A cash transaction refers to a transaction which involves an immediate outflow of cash towards the purchase of any goods, services, or assets. Cash transaction can be consumer-oriented or business-oriented.
What are the 4 four basic accounting transaction cycle? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance.
What are the 4 types of financial statements in accounting? ›
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the 4 recording transactions in a journal? ›
Information for each transaction recorded in a journal is known as an entry. An entry consists of four parts: (1) date, (2) debit, (3) credit, and (4) source document. Before a transaction is recorded in a journal, the transaction is analyzed into its debit and credit parts.
What are all 4 financial statements? ›
The 4 types of financial statements
- Balance sheets.
- Income statements.
- Cash flow statements.
- Statements of shareholders' equity.
