What is Business Transaction?

Explanation

In simpler terms, business transactions are defined as the event occurring with any third party, measurable in monetary considerations, and having a financial effect on the company. For example, in the case of a manufacturing company, the company needs to buy raw materials to be used to produce finished goods. For the same, the company will enter into a transaction with the vendor, which will have a monetary value; this will affect the company’s financials.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Business Transaction (wallstreetmojo.com)

Characteristics

  • These transactions are measurable in monetary terms.It involves an event occurring between the organization and a third party.The transaction is entered for the entity, not for any individual purpose.They are supported by the authorized and legitimate documents related to the event or transaction entered, e.g., in case of a sale, sale order & invoice will be considered legal documents for supporting the deal.

Examples of Business Transaction

#1 – Borrowing from Bank

This transaction will affect two accounts one is Cash/bank Account (Assets), and the second is Loan Account (Liability)

#2 – Purchase Goods from Vendor on Credit Basis

This transaction will have an effect on two accounts one is Purchase Account, and the second is Vendor Account (Liability); this transaction will also affect the inventory as the inventory stock will increase (Assets).

#3 – Rent and Electricity of Premises Paid

This transaction will affect two accounts, one is Cash/bank Account (Assets), and the second is the Rent and electricity Account (Expenses).

#4 – Cash Sale of Goods

This transaction will affect two accounts; one is Cash/bank Account (Assets), and the second is a Sale Account (Income); this transaction will also affect inventory as inventory stock will decrease (Assets).

#5 – Interest Paid

This transaction will affect two accounts, one is Cash/bank Account (Assets), and the second is an interest Account (Expenses).

Types of Business Transaction

These transactions can be classified on two bases. These bases are described as follows:

#1 – Cash Transaction and Credit Transaction

  • Cash Transaction: A transaction in which cash is involved means payment is received or paid at the time of occurrence of the deal. For example, Mr. A paid Rs.10000 as the rent of his premises in cash. This is a cash transaction because it involves cash payment at the transaction time. Similarly, Mr. A bought stationery for Rs. 5000 and paid cash.Credit Transaction: In credit transactions, cash is not involved at the transaction time; instead, the consideration paid is after a particular time (termed as credit period). For example, Mr. A sold goods to a customer on a credit basis and provided him a credit period of 30 days. So in this transaction, cash is not involved at the time of sale, but the customer will pay it after a credit period of 30 days.

#2 – Internal Transaction and External Transaction

  • Internal Transaction: There is no external party involved in an internal transaction. These transactions do not involve any exchange in value with the other external party, but it has monetary terms or value, i.e., impairment of fixed assetImpairment Of Fixed AssetImpaired Assets are assets on the balance sheet whose carrying value on the books exceeds the market value (recoverable amount), and the loss is recognized on the company’s income statement. Asset Impairment is commonly found in Balance Sheet items such as goodwill, long-term assets, inventory, and accounts receivable.read more. It reduces the value of fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more.External Transaction: In an external transaction, two or more parties are involved in the transaction. They are the usual transactions that occur daily. For example, purchasing goods, sales, rent expenses, electricity expenses paid, etc.

Importance

They are day-to-day transactions, and they may occur once a year or more than once a year. But while running a business, it is bound to be multiple times. Because if there is no transaction, then it means that the entity is not working & it is at an obsolete level and will shut down eventually. So having these transactions implies the entity is working.

It also depends on transactions and whether the entity is a downside or growing. If there are few transactions in the entity, it means it is working, but if there are many transactions in the entity, it means it is growing. So these transactions keep the company in existence and larger & frequently, the transactions that may relate to more competitive business practices and business interaction with the external and internal environment of the business.

Business Transactions vs. Investment Transactions

  • Business Transactions are usually the transactions entered in by the organization and are like trade, commerce, or manufacturing. Investment transactions are entered into to sell or purchase marketable securitiesMarketable SecuritiesMarketable securities are liquid assets that can be converted into cash quickly and are classified as current assets on a company’s balance sheet. Commercial Paper, Treasury notes, and other money market instruments are included in it.read more and other assets that may or may not be connected directly to the business.Business transactions generate income, which is the company’s income and taxable under the “Profit & Gain from the Business property.” In contrast, Investment transactions generate a capital gain, which is taxable under the heading “Income from Capital Gains.”Suppose the purchase & sale of an asset is the same as the assessee’s general trading business. In that case, these transactions will be considered business transactions, whereas if the purchase & sale of an asset is an independent activity against the ordinary course of business. The transactions will be considered investment transactions.In general, the frequency of these transactions is huge in numbers as they are entered in the course of business compared to the investment transactions entered as they are independent transactions.

Benefits

  • Recording these transactions helps evaluate the effectiveness of business and profit generation by the entity during the respective period.The transaction recording helps bifurcate the income produced from the business activities from the other incomes, which may be clubbed with a capital gainCapital GainCapital gain refers to the profit resulting from selling a capital asset or investment at a price higher than its purchase price.read more, lottery income, salary income, etc.They are recorded, and in the year-end or for a specified period, Final AccountsFinal AccountsFinal Accounts is the final stage of the accounting process, in which the various ledgers maintained in the Trial Balance (Books of Accounts) of the organization are presented in the specified way to provide the profitability and financial position of the entity for a specified period to stakeholders and other interested parties, i.e. Trading Account, Statement of Profit & Loss, Balance Sheet, and so on.read more are prepared through them to determine the assessee’s financial position.It helps the assessee to record and file his income tax returns as per statutory norms with a proper bifurcation of his income & expenditure into the appropriate heads.

Conclusion

Business transactions are the transactions entered by the assessee for the business purpose with the third party; measured into monetary consideration; recorded in the books of accounts of the assessee. The recording of these transactions into the books of accounts of the assessee depends upon the documents related to the event, which provide proper support to justify the transactions. Business transaction recording helps the assessor evaluate his business income separate from other incomes. The bifurcation helps the assessee file his income tax returns (ITR) for the required period as per the statutory norms.

This has been a guide to what business transactions are and their definition. Here we discuss types and examples of the business transactions along with benefits. You may learn more about our articles below on accounting –

  • Petty Cash Book FormatWhat is Accounting Transactions?Examples of Accounting TransactionsAn Arm’s Length Transaction