Debitoor Dictionary

Accounting terms explained in a simple way

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Transaction - What is a transaction?

A transaction in the business world refers to any event that can have an impact on the finances of the companies involved

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While the term ‘transaction’ can take on a number of different meanings depending on the context and the field in which is it being used, the most commonly understood meaning involved that of a financial exchange - in other words, the trade of a product or service for money.

In the business and accounting worlds, this can take on a myriad different forms, but all are essentially a transaction: an activity that affects the finances of a business and is recorded in their accounting system.

Types of transactions

Any transaction typically involves two parties: a buyer and a seller. This is of course, the simplest form of a transaction.

Business transactions

There are several characteristics that can help easily identify a business transaction. These include:

  1. An exchange that represents a clear amount of cash (something that can be evaluated as having a decisive cash value).

  2. The issuing of a document related to the transaction (for example: an invoice, payment receipt, etc.).

  3. A resulting action in the accounting of the business(es) involved. In double entry bookkeeping methods, this would mean an entry in the appropriate credits and debits.

However business transactions can also involve more than just goods or services and cash. They can become infinitely more complex when involving the exchange of other elements of cash value, such as:

  • Assets - the purchase or sale of items considered assets to the business. This can include either tangible or intangible assets.

  • Liabilities - the collecting of accounts receivable, for example, following up with customers who have outstanding balances.

  • Bank accounts - not necessarily a business transaction, but the movement of funds within a bank account can be considered transactions.

Record a transaction

Recording a transaction differs depending on the account method that has been selected for your business. This means that it is affected by whether you’re using cash accounting or accrual accounting.

Recording transactions in cash accounting

For most freelancers, sole traders, and small businesses, cash accounting is the method most often chosen. This is fairly straightforward as it involves recording a transaction when the cash or payment is actually collected from the customer.

In this approach, even if a service is completed in September, if the payment comes through in October, this is added in the accounts in October.

Recording transactions in accrual accounting

More commonly used by larger businesses with a significant annual turnover, accrual accounting means that a transaction is recorded when the products or service is delivered or completed (as opposed to when the payment is collected).

In accrual accounting therefore, if the same service is completed in September, the payment will be recorded in September, even if it is actually received in October.

Managing transactions with accounting software

No matter which accounting method your business is using, it can get a bit tedious to stay on top of each transaction. Thankfully, with Debitoor accounting & invoicing software, you can upload bank statements to see each payment reconcile automatically with the corresponding income or expense.

Plus, you can add payments even on the go with free-to-download mobile apps for both Android and iOS.