Transaction definition
/What is a Transaction in Accounting?
A transaction is a business event that has a monetary impact on an entity's financial statements, and is recorded as an entry in its accounting records. A larger business will have thousands of transactions, all of which must be recorded in its accounting system. The system is then used to summarize these transactions into a set of financial statements, which are produced following the end of each reporting period.
Accounting for a Transaction
A high-volume transaction, such as a billing to a customer, may be recorded in a specialized journal, which is then summarized and posted to the general ledger. Alternatively, lower-volume transactions are posted directly to the general ledger.
When the cash basis of accounting is being used, a transaction is recorded when cash is spent or received. Alternatively, under the accrual basis of accounting, a transaction is recorded when revenue is realized or when an expense is incurred, irrespective of the flow of cash.
Examples of Transactions
Examples of transactions are as follows:
Billing a customer for services rendered.
Paying a supplier for services rendered or goods delivered.
Paying a seller with cash and a note in order to obtain ownership of a property formerly owned by the seller.
Paying an employee for hours worked.
Receiving payment from a customer in exchange for goods or services delivered.
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FAQs
Do All Business Activities Qualify as Transactions?
Not all business activities qualify as transactions. Only activities that can be measured in monetary terms and affect the company’s financial position are recorded as transactions. For example, hiring an employee is not a transaction until the employee is paid, whereas purchasing supplies is a transaction because it immediately impacts assets and expenses.