What is a transaction
What is an accounting transaction?
An accounting transaction is a business event having a monetary impact on the financial statements of a business. It is recorded in the accounting records of the business. 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
- Purchase consumable supplies from a supplier
- Investment in another business
- Investment in marketable securities
- Engaging in a hedge to mitigate the effects of an unfavorable price change
- Borrow funds from a lender
- Issue a dividend to investors
- Sale of assets to a third party
There can also be fraudulent accounting transactions that are essentially made up by management or the accounting staff. These transactions can be avoided through the use of a comprehensive system of controls.
Every accounting transaction has to follow the dictates of the accounting equation. which states that any transaction must result in assets equaling liabilities plus shareholders' equity. For example:
- A sale to a customer results in an increase in accounts receivable (asset) and an increase
in revenue (indirectly increases stockholders' equity).
- A purchase from a supplier results in an increase in expenses (indirectly decreases stockholders' equity) and a decrease in cash (asset).
- A receipt of cash from a customer result in an increase in cash (asset) and a decrease in accounts receivable (asset).
- Borrowing funds from a lender results in an increase in cash (asset) and an increase in loans payable (liability).
Thus, every accounting transaction results in a balanced accounting equation.
Accounting transactions are either directly or indirectly recorded with a journal entry. The indirect variety is created when you use a module in the accounting software to record a transaction, and the module creates the journal entry for you. For example, the billing module in the accounting software will debit the accounts receivable account and credit the revenue account every time you create a customer invoice.
If a journal entry is created directly in a manual accounting system, verify that the sum of all debits equals the sum of all credits, or the transaction will be unbalanced, which makes it impossible to create financial statements. If a journal entry is created directly in an accounting software package, the software will refuse to accept the entry unless debits equal credits.
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