Accounting Transaction Definition + Example 2018

Hi, Today we talk about the Accounting Transaction So whenever a property changes hands there has been a business activity. The main type of business transactions is sales and purchases.

Accounting Transaction Definition + Example 2018

Accounting Transactions Definition + Example 2018

An Accounting Transaction is a business occasion monetarily affecting the fiscal reports of a business. It is recorded in the bookkeeping records of the business. Instances of bookkeeping exchanges are Sale in real money to a client.

Sales and purchases occur in two different ways, by cash or on credit

A sale takes place at one of two points in time

  • Cash sales. If the sales are for cash, the sale occurs when goods or services are given in exchange for immediate payment, in notes and coins, or by cheque or plastic card
  • Credit sales. If it is on credit, the sale occurs when the business sends out an invoice for the goods supplied; cash is received later

A purchase also takes place at one of two points in time.

  • Purchases for cash. If the goods are paid for in cash then the purchases occur when the goods and cash exchange hands
  • Purchases on credit. If the goods are bought on credit, the purchase normally occurs when the business receives the goods, accompanied by an invoice from the supplier. Cash is paid later.

Furthermore

  • A cash transaction is one where the buyer pays cash to the seller at the time the goods or services are transferred
  • A credit transaction is a sale or a purchase which occurs sometime earlier than cash is received or paid.

With credit activity, the point in time when a sale or purchases is recognized in the records of the business is not the same as the point in time when cash is eventually received or paid for the sale or purchase. There is a gap in the time between the sale or purchase and the eventual cash settlement. (it is possible that something might happen during that time which results in the amount of cash eventually paid(if any)being different from the original value of the sale or purchase on the invoice.

There are other Types of Business Transaction which needed to be recorded.

  • Payment of wages
  • Borrowing money
  • Offering a discount

The simplest form of business transaction is a cash Transaction.

Transactions Example

Accounting Transactions Definition + Example

Example 1: Owner Invests Capital in the Company
Owner invests $5,000. Analysis: Since money is deposited into the checking account, Cash is debited (the balance increased by $5,000). What account receives a credit? An Equity account called Owner’s Equity or Capital Contribution. Equity accounts are ‘negative’ accounts, crediting this Equity account increases its balance by $5,000.

Debit Cash (increase its balance)
Credit Owner’s Equity (increases its balance)

Example 2: Company Takes Out a Loan
The company borrows $8,000 from a bank. Analysis: Since the money will be deposited into the checking account, Cash is debited (the balance increased by $8,000.) The account to receive the credit is a Liability account called Loans Payable (you may create a separate account or sub-account for each loan). Liability accounts are credit accounts, so crediting the Liability account increases its negative balance by $8,000 (moves to the left on the number line).

Debit Cash (increases its balance)
Credit Loans Payable (increases its balance)

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