An accounting transaction is the monetary impact of an event on the finances of a business. This is recorded in your accounting record to track your transactions and help monitor the overall financial health of your business, especially if you are considering accounting outsourcing. In this article, you will learn some basic accounting transaction examples to guide you on your bookkeeping transactions or journal entries.
A transaction happens if there is an agreement between two parties (a buyer and a seller) to exchange goods or services. Each transaction has some sort of impact on one’s (business) financial position: assets, liabilities, or owner’s equity.
An accountant or bookkeeper has to record each transaction. Recording financial transactions is an important requirement for a bookkeeper and accountant. Accuracy of the records in the financial reports of business will determine the current standing of a business’s financial health. If you are looking to hire an accountant, using an accounting test can help you screen and find the best candidates.
While you’re at it, you can also suggest your hired accountant to take these career development courses so they can take full advantage of their skills for the business.
Accounting equation
All accounting transactions are part of the accounting equation, which has three parts. The accounting equation can be expressed as “assets= liabilities + owner’s equity.” To further understand these three fundamental aspects of the accounting equation, read on below:
Assets
Assets are resources owned by the business and have the potential to earn in the future. Examples of assets include land, cash, equipment, vehicles, and even debtors or people who owe your company money, termed as accounts receivable.
Liabilities
liabilities are debts owed by the business. These usually come in the form of bank loans, mortgages, accounts payable owed to suppliers, employee wages, and taxes. Liabilities are not necessarily bad. For example, bank loans are usually acquired to purchase assets that can, later on, help the business to grow.
Owner’s equity
Also known as “shareholder’s equity” in legal corporations, owner’s equity is a business owner’s stake or claim in a business. The reason for the term “shareholder” in a corporation is that the owner’s stake is a share of the entirety of the business along with other shareholders.
At the beginning of a business, owners usually invest resources, usually money, which stands as the business’s capital, with the desired result of earning it back and then some (profit).
Profit vs Income vs Expense
Apart from the components of the accounting equation, there are three terms that you will usually encounter during transactions.
Profits
As previously mentioned, business owners and shareholders initially invest capital into a company with the goal of earning profit later on. In its simplest form, profit is what is left over after the expenses have been deducted from the income. A company’s profit is usually a good indicator of its financial performance.
Income
Income is the occurrence where cash flows into the business. It is not so much as the actual money that gets into the business, but rather the act of money getting into the business, such as making sales. Income results in the increase of a business owner’s equity and assets, both of which are two components of the accounting equation.
Expense
The opposite of income, expense, is the event where money leaves the business. These may include employee wages, insurance premiums, and loan payments. Where income increases an owner’s equity, expense decreases it. Again, just like liabilities, the expense is not necessarily a bad thing. Examples of the expenses mentioned here exist to keep the business running and purchase more assets to keep it growing and consequently rake in more profits in the long term.
Examples of Accounting Transactions
1. Cash Transactions
This is the most common type of transaction, which refers to any purchase of an asset or an item using cash as immediate payment. Futures contracts or futures exchanges are not considered cash transactions because the exchange of money does not happen immediately.
For example, when a customer walks into your store and uses cash, debit card, or check to purchase an item, then it is considered a cash transaction.
2. Non Cash Transactions
This is a type of deal that does not involve the use of cash or a cash equivalent. Since this affair does not involve cash, it has zero impact on the cash flow. For example, a company buys new machinery, but instead of using cash, the company writes a promissory note or takes over an existing loan— a negotiable instrument.
Although it does not involve an actual cash transaction, non-cash transactions should be recorded in the income statement.
3. Credit Card Transaction
Many people prefer using a credit card as a mode of payment. In fact, there were about 518 million credit card accounts in the US by the end of 2022.
A credit card transaction is the opposite of a cash transaction. This is because the promised payment is at an agreed future date. The payment to your business will come from the credit card company of your customer and not directly from your customer.
When you receive payments via credit card for processing, you don’t record those under your sales revenue. Instead, you list them under expenses.
4. Personal Transaction
This type of transaction is performed for personal purposes with respect to security for any personal account. For example, when you buy a new computer for online classes’ purposes, which is a personal transaction because you are going to use your computer for personal use.
5. Business Transaction
Business transactions are everyday undertakings that help keep a business running. It has an effect on your accounting test elements, i.e., assets, liabilities, capital, income, and expense. These may be classified into two: exchange and non-exchange.
Exchange Transaction
This is the physical exchange of goods in which one party receives the assets (product or service) and directly gives an equal value (payment or cash) to another party.
Non-Exchange Transaction
This does not involve physical exchanges. This is when one party (your business) receives something of value without directly giving value in exchange. For example, wear and tear of equipment, fines and penalties, donations, typhoon loss, etc.
6. Non-Business Transactions
You may have expenditures or incomes that do not originate from the business and yet are also not personal in nature. These dealings fall under non-business transactions. Examples of these include donations, and social responsibility programs like tree planting or beach cleanups that require some form of funding.
7. Visible Transaction
These are (physical or tangible) transactions that are real and visible in our eyes. Such examples are machinery, equipment, tools, furniture, etc.
8. Invisible Transaction
As the name suggests, these transactions are not visible in our eyes or not tangible. This includes services such as banking, shipping, investment services, education, tourism, etc.
9. External Transaction
This is the exchange of goods or services with money between two parties that changes the accounting equation. Remember that in order for this type of transaction to exist, a change in the accounting equation must take place. There should be a monetary exchange.
10. Internal Transaction
This is the process or arrangement within an organization and does not involve sales. There is no outside person, second party, or organization involved. It is the exchange from one department to another in the same organization that can affect the accounting equation.
For example, the internal transaction is the use of an organization’s regular supplies, such as the salary of the employees.
Double-Entry System
Double-entry is the fundamental concept of accounting and bookkeeping. Every accounting entry should have a corresponding opposite entry to a different account. The two equal and corresponding sides are known as debit and credit.
The double-entry system is a standardized process that improves the accuracy of financial statements and ensures that it is error-free. Debit and credit must always equal each other so that an accounting transaction is always balanced.
Suggested Online Courses
It is essential that you have an understanding of the basics of accounting, its terms, and concept. Anybody who is new in accounting, bookkeeping, or business can benefit from this online course. You will learn the accounting process and its cycle.
By the end of the online course, you will have an understanding of the following:
- Transactions
- Financial statements
- Balance sheet
- Assets
- Liabilities
- Equity
- Income statement
- Accrual basis
- Debits and credits
- Accounts
- Journalizing
- Posting
- The trial balance
- Making of financial statements
If the concepts of accounting and financial information confuse you, then you should take this online course. You will learn about the different kinds of financial statements and how to analyze them.
In this online course, you will gain knowledge and hone your financial literacy skills. By the end of the course, you will become a more financially intelligent person who is no longer scared of numbers. Also, you will learn to read, understand, and analyze financial statements.
Are you interested in learning financial accounting, especially about intercorporate acquisitions and investments in other entities? This online course focuses heavily on intercorporate acquisitions and investments in other entities. Taking this online course is also useful if you want to refine your skills in understanding double-entry accounting.
Expert Insights
If you wish to learn more about accounting transactions, here are a couple of tips from the industry experts.
1. Use different methods
According to Deepak Shukla, one should use both traditional and modern ways of learning to be able to grasp various accounting transactions.
“Alongside immersive learning tools, studying essential texts such as the "Foundation of Finance" can greatly accelerate the mastery of accounting terms. This book provides a solid theoretical framework, complemented by practical examples, making it invaluable for anyone looking to quickly grasp the essentials of accounting. By integrating this study with interactive online courses, software tutorials, reputable financial blogs, and active participation in online accounting communities, learners can enhance their comprehension and application of accounting principles. Deepak underscores the synergy between traditional and modern learning methods as crucial for those aspiring to become proficient in accounting swiftly.”
2. Join online forums and study groups
Jen Diaz, an accounting expert, offers this practical advice.
“Engage with peers and professionals in online accounting forums or study groups. Sharing insights and solving problems together can offer new perspectives and shortcuts to understanding transactions."
Frequently Asked Questions
How does a credit card transaction impact a business’s accounting records?
Credit card transactions are recorded as accounts receivable at the time of sale, reflecting revenue. When the credit card company processes the payment, the accounts receivable is decreased, and cash is increased. Credit card processing fees are recorded as an expense, reducing net income.
What is the significance of the double-entry system in recording transactions?
The double-entry system ensures that for every transaction, two entries are made: a debit to one account and a credit to another. This system maintains the balance of the accounting equation, ensuring that all financial transactions are accurately recorded and the financial statements are complete and error-free.
How can an accounting test help in selecting a competent accountant?
An accounting test evaluates candidates’ knowledge of accounting principles, their ability to apply these principles in real-world scenarios, and their problem-solving skills. This helps identify candidates with the right skills and knowledge base, ensuring the accuracy and reliability of a business’s financial records.
In what ways do non-cash transactions affect a company’s financial statements?
Non-cash transactions affect financial statements by altering the value of assets, liabilities, or equity without an immediate impact on cash flow. They are recorded at the fair value of the items exchanged and can influence the balance sheet and income statement, reflecting the true financial position and performance of the company.
What are the key differences between personal, business, and non-business transactions?
Personal transactions involve individuals and are not recorded in business accounting records. Business transactions relate directly to the operation and performance of the business, affecting financial statements. Non-business transactions, such as donations, may not directly benefit the business financially but can impact the company’s social responsibility profile and tax liabilities.
Key Takeaways
The content provides a comprehensive overview of accounting transactions, emphasizing their importance in tracking the financial health of a business. It explains the basic accounting equation (Assets = Liabilities + Equity) and categorizes transactions into various types, including cash, non-cash, credit card, personal, business, and internal transactions, among others. The significance of double-entry bookkeeping is highlighted as a method to ensure accuracy and balance in financial records. Additionally, the article discusses the roles of assets, liabilities, and owner’s equity in the accounting process, alongside the concepts of profit, income, and expense, offering insights into how these elements interact to reflect a company’s financial standing.
Understanding accounting transactions is crucial for anyone looking to gain insight into the financial workings of a business. With each transaction telling a part of the story of a business’s financial journey, gaining proficiency in accounting transactions opens up a world of strategic financial planning and effective business management.
If you’re motivated to dive deeper into the world of accounting and enhance your financial literacy, the Skill Success All Access Pass offers an unparalleled opportunity. With access to more than 3,000 online courses covering everything from basic accounting principles to advanced financial accounting, this pass is your gateway to becoming proficient in understanding and managing accounting transactions.
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