Updated July 20, 2023
Introduction to Accounting Transaction
Transactions are events that take place on a consistent basis but Accounting transactions are events that happen to an entity having an impact on the financials of the company and require the company to document and relate it to the present accounting scenario and have accounting or monetary effect on the financial statements.
Explanation
The monetary effect on the financial statement by recording some accounting transactions over the period in the business. It is the method of keeping the track record of certain transactions which helps to analyze and predict the financial health of the businesses. There is also the existence of fraudulent accounting transactions conducted by the management and accountants of the company.
These transactions can be avoided by the effective control of the business’s technique of the company. Every transaction must follow up the accounting equation through which transactions will result in liabilities equalling assets and shareholder’s equity fund. The accounting transaction outcomes in the well-adjusted accounting equation.
These transactions are directly or indirectly recorded in a manner to maintain a journal entry. The indirect way of recording the transaction is by using modules of the software to record an accounting transaction. The direct way of recording these transactions is created through manual accounting which verifies the total of all debits equals the total of all credits.
Features of Accounting Transaction
Some of the features are given below:
- There must be two parties- No transaction can be done without two parties. It is the most important feature of any transaction. There is no existence of a giver without a receiver. Hence it is mandatory to have two parties for recording any transaction.
- The event must be quantitative form- It is important for recording any transaction to have it in measurable form or terms of money.
- The event should result in the transfer of service or property- It is a particularly important feature of accounting transactions because, without the transfer of property or service, the transaction cannot be done. For records and control, it is necessary to have any transaction done by way of transferring services or property.
- The event shall affect the financial position of the business- Accounting transaction determines the financial position of any business or any charges thereon.
Examples of Accounting Transaction
Following are the examples are given below:
1. Owner Invests Capital in the Company
Suppose investor invests $10,000. Analysis. As money is deposited in the account, cash is debited, and the balance is increased by $10,000. What account collects a credit? An Equity account is known as Capital contribution or owner’s equity. So, the equity account is negative accounts, crediting this equity fund account and increases its balance by $10,000.
2. Monthly Statement Fee from the Bank
Suppose Bank is charging a monthly statement fee of $20. Analysis- The accounting transaction is entered through a journal entry in the books of account every month when the checking account is balanced. As the money is removed from the checking account, cash is being credited and the balance is decreased by $20. The expense account is known as Bank service charges receives the debit. Debiting the bank fees means increasing its balance by such amount. Crediting the cash decreases its balance by such amount.
Types of Accounting Transaction
Following are the types of an accounting transaction is given below:
1. Cash Transaction
They are the most common type of accounting transaction which is crucial for every business activity. These are the transactions that dealt with cash only. Say: if a company purchases stationery for the administration work and pays the cash and termed as a cash transaction.
2. Now- Cash Transaction
These are the transactions that are necessary for the business who want to deal with credit sales or purchase and vice-versa. In these types of transactions, cash has been paid or maybe promised to pay in the future. For example: If company X purchases machinery from company Z and found it defective and returns it to the owner so there is no credit or debit of cash and hence it is called a non-cash transaction.
3. Credit Transaction
These transactions are different from the cash transaction because payment is on a credit basis at a future agreed price. There is some specific period to pay the transaction amount. For example, 30 credit days or 90 credit days scheme, depending on the conditions followed by the company.
Recording of Accounting Transaction
When the event occurs, the accounting transactions have been recorded as per company’s policy such as:
- Journal Entries: This is the most used method in the accounting transaction by debiting and crediting the transaction and the balance should be tallied accordingly.
- Receipts of Invoices: This is the prima facie document for recording any transaction by the accountant. The amount is systematically entered in the accounting software and maintain it for further records.
- Issuance of Paychecks: It is used for the payment of employee’s salaries, so the accountant makes an entry in the accounting book according to the pay rates. The module will automatically update the software while entering the entries in the system.
Benefits of Accounting Transaction
Some of the benefits are:
- Evaluation of financial statements
- Maintenance and Recording of business transaction
- Comparison is available from past facts and data to present factual data
- Helpful in calculating the valuation of the business.
- It provides information regarding stakeholders and related parties to the company.
- Helpful in decision making and acts as evidence for legal matters.
- It helps in dealing with taxation matters as well.
- It is also helpful in changing the financial position of the company.
- It helps detect errors and omissions in the ordinary course of business.
Conclusion
An accounting transaction is a method of recording financial data that has an impact on the financial statements of the company. It is the appropriate technique used by the business to record each transaction of the day to day event which would help in measuring the value of the businesses. It is the tool that is important to detect errors and give check over the transaction of the business so that fraud could not enter the space of the business. Every event shall measure in terms of money so that the monetary impact can be calculated easily. This is the method of recording manually or entering into the modules of accounting software to provide impactful data to the company.
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