Transactions: Definition in Accounting

Transactions: Definition in Accounting

Transactions are those activities of a business, which involve the transfer of money or goods or services between two persons or two accounts. It is conformity between a buyer and a seller to trade goods, services or financial instruments. For example, purchase of goods, the sale of goods, borrowing from the bank, lending money, salaries paid, rent paid, the commission received and dividend received. So, transactions are events that change the accounting equation during a period. Business transactions are recorded in the books of the business and summarized in financial reports.

Transactions are of two types, namely, cash and credit transactions;

Cash Transaction is one where cash receipt or payment is involved in the transaction. A cash transaction is a transaction where payment is settled immediately. A cash Transaction normally requires all particulars of the transaction including delivery and payment to be consummated within the same day.

Credit Transaction is one where cash is not involved immediately but will be paid or received later. If the value of a transaction is not met in cash immediately, it is called credit transaction e.g. furniture purchased on account or on credit.

Examples of accounting transactions are:

  • Sale in cash to a customer
  • Sale on credit to a customer
  • Receive cash in payment of an invoice owed by a customer
  • Purchase fixed assets from a supplier
  • Record the depreciation of a fixed asset over time