Transaction
Candlefocus EditorThe most common type of transaction is when money is exchanged for goods or services by one person or organization. It could also involve a transfer of money from one account to another, or when a business takes out a loan or an investor buy stocks. In the event of a transaction, two parties are involved, with each having different roles, such as buyer and seller, lender and borrower, or investor and company issuing stocks. The party making the payment is known as the payer or creditor, while the one receiving the payment is known as the payee or debtor.
The type of transaction determines how it is recorded on the financial statements. For example, cash transactions wherein money is exchanged for goods or services are recorded on the income statement as an expense or revenue. On the other hand, transactions involving payment of interest or commission are recorded on the cash flow statement as an inflow or outflow.
In the world of corporate accounting, transactions can be a little bit tricky. Accrual accounting, a comprehensive accounting system, recognizes transactions right after they are finalized, regardless of when payment is received or made. Cash accounting is mainly used by smaller entities and records transactions only when money is received in or paid out. However, third-party transactions often add complexity to the process.
In summary, a transaction is an exchange between two parties involving money, goods, services, or all three. It is an integral part of the accounting system and affects financial statements such as the income statement and cash flow statement. The type of accounting system used to record the transaction depends on the complexity of the exchange and whether cash is involved. Cash accounting tends to be used by small businesses, while accrual accounting is more suitable for larger entities. Lastly, third-party transactions can further complicate the accounting process.