What is accounting transaction

A business transaction is the occurrence of an event of a condition that must e recorded. For example, the payment of monthly telephone bill of $50, the purchase of $400 of merchandise on credit. And the acquisition of land and store building for $5000 for which payment is to be made in installments are illustrative of the variety of business transactions. The first two transactions are relatively simple: a payment of money in exchange for a service, and a promise to pay within a short time in exchange for commodities. The purchase of a building and the land on which it is situated allocated between the land and the building, and the agreement usually provides for spreading the payment of a substantial part of the price over a period of years and for the payment of interests on the unpaid balance. There may be other provisions designed to safeguard the seller until the full price has been paid.

It can be readily seen that a particular business transaction may lead to an event or a condition that constitutes another transaction. For example, the purchase of commodity on credit described above will be followed by payment to the creditor, which is another transaction; and each time a portion of the merchandise is sold, another transaction occurs. Each of these events needs to be recorded. Each payment to the seller of the land and the building is a transaction, as is the payment of interest. The fact that the life of the building is limited must also be given recognition in the records.

The wearing-out of the building is not an exchange of goods or services between the business and an outsider, but it is nevertheless a significant event that must be recorded. Transactions of this type, as well as others not directly related to outsiders, are sometimes referred to as internal transactions.

The system of records begins with the recording of each transaction. There are many different methods of recording transactions. For example, a sale of a service for cash may be recorded by a hand written receipt, or it may be recorded by merely depressing the appropriate keys of a cash register. Regardless of the recording system used, the data thus accumulated provide the basis for the preparation of various summarizing reports. In addition, the supporting documents and other forms of evidence furnish a basis for subsequent reviews and verification by internal auditors, external auditors and others.