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Transaction in accounting refers to cash and non-cash transactions related to a business that impact its financial statements.
Cash transactions occur when there is a sale of goods and services to a customer and the customer pays cash immediately. In cash transactions, there is always a physical exchange of money, be it payment of penalties, receiving loans, payment of salaries, receipt of the advance, etc.
Non-cash accounting transactions include credit sales, depreciation, valuation exercises, credit purchases, etc. In non-cash transactions, there could be an obligation to pay or receive on a future date, revaluation of goodwill, depreciation calculation to reduce the value of an asset, etc. i.e. all those transactions where cash is not exchanged.
Generally, a transaction always involves a monetary exchange, but when it comes to transaction in accounting system, then non-monetary transactions are also included in the definition of “transaction” nomenclature.
The main intent of a bookkeeping and accounting system is to record transactions by:
A company’s financial statements depict the financial health of the company, and the accuracy of these statements depends upon the accuracy with which the transactions are recorded.
Recording transactions is important to know about a company’s income and expenses, where the company is heading, the efficiency of using the resources, spotting any gaps or inefficiencies, reporting about the company’s financial position to the investors, creditors, shareholders, lenders, government, etc.
Accounting transactions are also financial transactions, that impact the accounting equation.
Accounting Equation is Assets = Liabilities + Equity
Modern day bookkeeping is recording, organizing, and classifying the transactions as per the accounting equation following GAAP guidelines and other regulatory guidelines. Accounting interpreting the transactions, compiling them into final accounts, generation financial reports for management, investors, tax authorities, banks, analysts, etc.
Single entry is a system where accounting transactions are recorded in a manner that it affects only one account.
Double entry system record accounting transactions affecting atleast two parties or accounts, it uses debt and credit method.
In cash accounting method, accounting transactions are recorded only when the cash is received or given. Thus, cash accounting will not record transactions related to credit sales, accounts payable account, accrued expenses, etc.
Often startups, small businesses, and self employed professional do prefer cash basis accounting for its simplicity. But cash basis accounting fails to record non cash transactions and does not represent the true picture of company’s financial statements.
Accrual accounting method records a transaction when there is an obligation to pay or receive money. In accrual basis accounting, recording a transaction is not depended on the cash exchanging hands. Accrual accounting method records both cash and non cash transactions.
Accrual accounting is recommended by most of the accounting bodies, governments, tax bodies, etc. Accrual method is useful as the business grows and can handle even complex accounting involving valuations, mergers and acquisitions, depreciation, currency exchange rate differences, etc.
A financial transaction involving the exchange of money or currency. A cash transaction necessarily involves cash payment which can also be paid by hand or digitally by a payment app, debit card, etc. resulting in immediate inflow or outflow of money. All cash transactions in a business affects cash flow statements and cash account.
All the transactions that do not involve money, but still impacts the accounting equation. Like, depreciation reduces the asset and are non-monetary expense shown in the income statement.
Credit transactions occur when goods or services are provided with the expectation of payment at a later date, such as a business delivering products to a client on credit.
Business transactions form the core of a company’s operations, including sales, purchases, and exchanges directly related to its primary objectives, like a retail store selling merchandise to customers.
Non-business transactions encompass activities unrelated to the core operations of a business, like an employee buying personal items using the company’s credit card.
An internal transaction involve exchanges within the organization, such as the transfer of assets between departments, like one department transferring office equipment to another.
An external transaction involve interactions with entities outside the organization, such as a supplier delivering raw materials to the company.
Third party transactions involves middle men or facilitators like brokers, escrow company, etc. between two parties.
Accurately recording transactions is the backbone of your business’s financial management and helps to evaluate organization’s financial performance.
To record income, other expenses, financial transactions related to funds, loans, flow of capital, appreciation of property, and other complex issues, businesses can make use of accounting software like Akounto, that gives inbuilt option to choose and switch between accrual method and cash basis method. It handles everything from setting up charts of accounts, invoice generation, sending payment reminders, to generating financial statements.
Accounting transactions directly impact financial statements by altering the company’s assets, liabilities, and equity through cash and non-cash transactions. These changes are reflected in income statements, balance sheets, and cash flow statements.
Accurate recording of accounting transactions ensures transparency by providing a clear and honest depiction of a company’s financial activities to stakeholders, investors, and regulatory bodies.
Errors in transaction recording can cause imbalances in the trial balance, where total debits may not equal total credits, indicating mistakes that need to be corrected before preparing financial statements.
