Accounting Transaction

Next Lesson: Golden Rules of Accounting

Accounting Transaction is heartbeat of every business organization. All economic activities are called transactions. Any dealing between two persons involving money or a valuable thing is called transaction. Every person cannot fulfill all his needs like food, clothing, housing etc. on his own. He, therefore, depends on other people to provide him with some of his needs.

Accounting Transaction or business transactions is a business’s economic events recorded by accountants. Transactions may be external or internal. External transactions involve economic events between the company and some outside enterprise. Each accounting transaction must have a dual effect on the accounting equation. For example, if an asset is increased, there must be a corresponding:

Decrease in another asset, or
Increase in a specific liability, or
Increase in owner’s equity.

Two or more items could be affected. For example, as one asset is increased $10,000, another asset could decrease $6,000 and a liability could increase $4,000. Any change in a liability or ownership claim is subject to similar analysis.

Forms of Transactions

Translating every transaction in terms of money does not always mean that the money changes hands, the same time at which the transaction takes place. It may be paid before or after the goods are exchanged. When the money value of an item being purchased is paid, at the same time the item is exchanged. The accounting transaction is said to be a Cash Transaction. On the other hand, if the payment is delayed to a future date, the transaction is termed as a Credit Transaction.

Transaction Analysis

Companies carry on many activities that do not represent business transactions. Examples are hiring employees, answering the telephone, talking with customers, and placing merchandise orders. Some of these activities may lead to business transactions: Employees will earn wages, and suppliers will deliver ordered merchandise. The company must analyze each event to find out if it affects the components of the accounting equation. If it does, the company will record the transaction.