Business Transaction

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.[1]

A business transaction, in the context of electronic commerce, is any monetary transaction that is made between consumers or businesses via the Internet.[2]

Three Important Rules in Recording Business Transactions[3]
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[4]
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.

See Also

A Business Transaction is an economic event with a monetary impact on an entity's financial statements, often initiated by exchanging goods, services, or funds between two or more parties. Transactions can include sales, purchases, loans, transfers, and agreements. They are the foundation of business operations and are recorded and reported in the entity's accounting system, contributing to the compilation of financial statements that reflect the company's financial health and performance. Proper documentation and management of business transactions are crucial for accurate financial reporting, legal compliance, and effective operational analysis.

  • Accounting Principles: Discussing the standardized guidelines and rules that govern financial accounting practices, such as the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), which dictate how transactions are recorded.
  • Double-Entry Bookkeeping: Covering the system used to record the financial impact of a transaction, where every entry to an account requires a corresponding and opposite entry to a different account, ensuring the accounting equation is always balanced.
  • Financial Statement: Explaining the summary reports that show how a business's financial performance, position, and cash flows have changed over a specific period, which are compiled from transaction records.
  • Accounts Payable and Accounts Receivable: Discussing the short-term debts to suppliers (payables) and the amounts owed by customers (receivables), representing transactions pending completion.
  • Cash Flow Management: Covering the tracking of the amount of cash coming in and going out of a business, which is directly influenced by business transactions.
  • Audit and Compliance: Explaining the processes of examining an organization's financial records to ensure accuracy and adherence to regulatory standards, verifying proper transaction recording and reporting.
  • Taxation: Discussing the implications of business transactions on a company's tax obligations, including sales tax, income tax, and other relevant taxes.
  • Inventory Management: Covering the process of ordering, storing, and using a company's inventory, which involves transactions related to purchasing and selling goods.
  • Contract Management: Discussing the management of contracts made with customers, vendors, partners, or employees, including negotiation, execution, and analysis to maximize operational and financial performance.
  • E-commerce Transactions: Explaining transactions conducted electronically on the internet, highlighting the unique aspects of online sales, payments, and security considerations.
  • Mergers and Acquisitions (M&A): Covering the aspects of corporate strategy, finance, and management dealing with the buying, selling, dividing, and combining of different companies and similar entities.
  • Payment Processing: Discussing the collection and transfer of funds from buyers to sellers, facilitated by various methods such as credit cards, electronic funds transfers, and digital wallets.


  1. What is a Business Transaction? Accounting Explained
  2. Defining Business Transaction Techopedia
  3. Rules in Recording Business Transactions MissCPA
  4. Business Transaction Types Chron

Further Reading