Accounting transaction definition
/What is an Accounting Transaction?
An accounting transaction is a business event having a monetary impact on the financial statements of a business. It is recorded in the accounting records of the business.
Types of Accounting Transactions
Several types of accounting transactions are listed below:
Cash sale. A sale where goods or services are sold, and payment is received immediately in cash.
Credit sale. A sale where goods or services are delivered, but payment will be received at a later date.
Cash purchase. A transaction where goods or services are purchased, and payment is made immediately in cash.
Credit purchase. A transaction where goods or services are acquired, but payment will be made later.
Receipt of cash from debtors. Cash is received from customers who previously bought goods or services on credit.
Payment to creditors. Cash is paid to suppliers for goods or services bought earlier on credit.
Owner's capital investment. The owner introduces cash or assets into the business to increase capital.
Withdrawal of cash for personal use. The owner takes cash from the business for personal use, reducing capital.
Payment of expenses. Cash or credit is used to pay for operating expenses like rent, salaries, utilities, etc.
Depreciation of assets. The reduction in the value of fixed assets is recorded as an expense.
Bank loan received. The business receives cash from a bank loan, increasing cash and liabilities.
Loan repayment. The business pays back part or all of a loan, reducing liabilities.
Interest income. Interest earned on bank deposits or other investments is recorded as income.
Interest expense. Interest paid on loans or borrowed funds is recorded as an expense.
Purchase of fixed assets. Cash or credit is used to acquire long-term assets like machinery, buildings, or vehicles.
Fraudulent Accounting Transactions
There can be fraudulent accounting transactions that are essentially made up by management or the accounting staff. They may create these transactions in order to make the financial results of their business appear better than is actually the case. There are several reasons for engaging in this type of fraud, including reaching profit targets that will result in bonus payouts, and showing results that exceed the covenants included in a loan agreement.
These transactions can be avoided through the use of a comprehensive system of controls.
Related AccountingTools Courses
Impact of the Accounting Equation on Accounting Transactions
Every accounting transaction has to follow the dictates of the accounting equation, which states that any transaction must result in assets equaling liabilities plus shareholders' equity. For example:
A sale to a customer results in an increase in accounts receivable (asset) and an increase in revenue (indirectly increases stockholders' equity).
A purchase from a supplier results in an increase in expenses (indirectly decreases shareholders' equity) and a decrease in cash (asset).
A receipt of cash from a customer result in an increase in cash (asset) and a decrease in accounts receivable (asset).
Borrowing funds from a lender results in an increase in cash (asset) and an increase in loans payable (liability).
Thus, every accounting transaction results in a balanced accounting equation.
How to Record an Accounting Transaction
Accounting transactions are either directly or indirectly recorded with a journal entry. The indirect variety is created when you use a module in the accounting software to record a transaction, and the module creates the journal entry for you. For example, the billing module in the accounting software will debit the accounts receivable account and credit the revenue account every time you create a customer invoice.
If a journal entry is created directly in a manual accounting system, verify that the sum of all debits equals the sum of all credits, or the transaction will be unbalanced, which makes it impossible to create financial statements. If a journal entry is created directly in an accounting software package, the software will refuse to accept the entry unless debits equal credits.