What are Accounting Transactions?
Accounting transactions happen any time an expense or income is made in a business. Examples of such transactions can be purchasing the business makes, raw materials, income from a sale, or dividends from stocks or other investments. Anything that impacts finance can be a log entry and can be called an accounting transaction.
Accounting transactions are usually reported in the year in which they occur.
Accounting transactions are activities that are recorded in a transaction log entry. These are the events that can occur for each product, service, quantity, or customer. These include purchases of goods and services, transfers from customer accounts, balance-settlement with correspondent accounts (an account from which the vendor has made a debit or credit payment on behalf of the customer), and cash advances from the bank and forward transfer from platform accounts.
Types of Accounting Transactions based on Institutional Relationship
Accounting transactions may be classified according to institutional relationships by considering external and internal transactions.
- External transactions are outside of a company’s domain, including those made on the other side of the network, whether peer-to-peer or corporate. An external transaction can take several forms; a cash payment, a grant payment, or in legal terms, an asset transfer.
- Internal transactions are handled by a person whose job is to gather information while performing accounting activities. Except for salary, most companies are expected to use internal transactions to report financial statements quarter by quarter. Internal accounting is done by an employee who collects, analyzes, and then reports on the income and expenses of the entire company unit.
Types of Accounting Transactions based on the Exchange of Cash
- Cash transactions are any transfer of cash from one person to another. For example, if company A purchases raw materials from company B and pays them cash or cards, it is a cash transaction.
- Non-cash transactions, also called non-cash expenses or non-revenues, is any expense that does not have a documented event that has to be paid in cash. For example, if Company A purchases raw material from Company B and sees that it is defective. Company A returns the material without any cash spent, so it falls under non-cash transactions.
- Credit transaction occurs when a company or individual makes payments to another party in advance for goods or services that are supposed to be delivered or performed on a certain future date. Most companies offer 30, 60, or 90-day payment terms – it’s just industry standard.
Types of Accounting Transactions based on Objective
- Business Transactions are the most common kinds of accounting transactions: payment of salaries, commissions, wages or hourly wages, purchases of property, services, inventory and equipment, and subscription fees.
- Non-business transactions are typically donations, purchases from businesses, and certain prizes won at sporting events.
- Personal transactions are done for personal purposes such as shopping, lunch, buying a laptop, etc.
Double-entry Bookkeeping of Accounting Transactions
Double-entry bookkeeping refers to the standard accounting practice in which every debit has a corresponding credit or pair of accounts. This practice helps accountants accurately record financial transactions and increase the efficiency of any firm.
Using double-entry bookkeeping, every transaction made in a company’s books must be recorded with the debit being counted toward assets and the amount of the credit being counted toward liabilities and owner’s equity.
Examples of Accounting Transactions
Example 1: Owner Invests Capital in the Company
The owner invests capital by depositing $8,000 into the company’s checking account.
By depositing the money into the checking account, cash is debited and the balance increased by $8,000. An Equity account called ‘Owner’s Equity or Capital Contribution’ receives a $8,000 credit. If the owner of a company invests capital, an Equity account is credited for the amount invested.
Example 2: Company Takes Out a Loan
Let us assume the company X borrows $10,000 from a bank into the checking account.
Since the money is deposited into the checking account, cash is debited, which means the balance increased by $10,000. The account which will receive the credit is a Liability account called Loans Payable. Liability accounts are also known as credit accounts, so crediting the Liability account increases its negative balance by $10,000.
Example 3: Monthly Statement Fee from Bank
For example, let’s say, Your bank charges for the monthly statement fee. Let the amount be $20.
Now, every month this transaction is entered via a journal entry when the checking account is balanced. Since money was withdrawn from the checking account, cash is credited (the balance decreased by $20). The Expense account called Bank Service Charges receives the debit.
Example 4: Making a Loan Payment
You pay $750, via check, on the $10,000 loan acquired in Example 2. Of this amount, $700 is applied to the principal, and $50 is applied to the loan interest.
Since a check is written, QuickBooks will credit cash automatically. Considering this case, the debit is split between two accounts. To reflect the $700 that has been applied to the loan balance, debit the loan account. The $50 interest paid is an expense, so debit the expense account called Loan Interest. One thing to remember is that even when the debit is split between two accounts, the total debit and the total credit must always be equal.