Business Transaction is an event which affects a business financially or in other words it causes a change in its assets, liabilities and/or equity. Any event which does not affect the business financially is not recorded in accounting system.
Three Important Rules in Recording Business Transactions
In order for a business transaction to be valid and recorded in the accounting books, it must meet all of the following rules and criteria:
- Financial in Nature: A recorded business transaction must be financial in nature. Financial refers to something with equivalent money’s worth. The money’s worth may be in a form of cash, receivable, investment, inventory, stock, property, equipment, land, building, vehicle, right, franchise, patent, payable, bond, equity, etc.
- Exchange of Values: In recording a valid business transaction, the next rule and criteria is that it must involve an exchange of values. The exchange means that when you receive something you give up another thing. Like when you record an increase, you must also record an equivalent decrease.
- Business Entity Concept: Last but not the least important rule and criteria in recording business transaction is to abide with the business entity concept, which mandates that recorded information in the business accounting books should be treated separately from the owner. It means any personal transaction of the owner should not be included in the records of the business, and vice versa.
Types of Business Transactions
The accounting definition of a business transaction, according to the online Business Dictionary, is "an economic event that initiates the accounting process of recording it in a company's accounting system." This is the official definition. However, selling an item at a garage sale where no accounting system is in place also can be a business transaction.
- Simple Transactions: Some transactions are simple exchanges. Paying two dollars for a cup of coffee is a business transaction. Getting a haircut, eating at a restaurant, even buying something expensive like a washer or dryer can be a simple transaction. Most simple transactions are singular events which may or may not be repeated and take place between a vendor and a customer.
- Complex Transactions: Many transactions are complex. Purchasing an item with credit involves a series of transactions before the purchase can be completed. Setting up a vacation through a travel agency requires booking hotels, flights, possibly rail or boat travel, tours and making other arrangements, all of which require business transactions. Getting a mortgage to buy a home or building requires numerous transactions with the lender, title company, real estate agency, buyer, seller, loan underwriter and more.
- Ongoing Transactions: Some business transactions are ongoing. Your relationship with your bank is an ongoing business transaction that may encompass multiple types of transactions. A contract between a supplier or vendor and another business can involve multiple business transactions between the vendor, its employees, its suppliers, its customer and the customer's market. There are also international transactions between countries; a loan from one government to another or a sales of goods and services could become an extremely complex ongoing transaction.