Financial Transaction in accounting
What is a financial transaction in accounting?
In accounting, a financial transaction in accounting is an event that impacts on the monetary value of an asset, a liability, or the owner’s equity of a business and causes it to change. A financial transaction is characterized by the monetary impact it has on the financial statements of the business created by recording its details in an accounting register called journals. An event that does not impact on the business financially or monetarily is not recorded in the journals.
What is the purpose of recording a financial transaction in accounting?
Business stakeholders like managers, investors and funders need relevant and timely information to help them make financial decisions about the business resources under their control. In accounting, this information is supplied by financial reports that inform stakeholders of the current financial position and performance of the business. By recording financial transactions that impact on the assets, liabilities and owners equity of a business, stakeholders are able to stay constantly informed of the changes taking place in the financial position and performance of the business.
What is a financial transaction in accounting like?
A financial transaction is like a sporting game for a team that is part of a league ladder. The results of each game impacts on the standing of the team in the league which informs the coach, players and administrators (stakeholders) of the position and performance of the team.
Where does the financial transaction fit into the accounting process?
- What comes before? An agreement is reached between parties to enter into the financial transaction.
- The financial transaction takes place.
- What comes after? Source documents are created and processed
What are the different types of financial transactions?
Financial transactions involve a single entry in the journals, stating its date, amount and description. There are four main types of financial transactions that occur in a business. The four types of financial transactions that impact of the business are sales, purchases, receipts, and payments.
- Sales are financial transactions that legally transfer property for money or credit. Sales are a part of revenue that is earned by the business when goods are delivered or when services have been rendered to customer. Sales financial transactions made by extending credit to the customers would be recorded as accounts receivables.
- Purchases are financial transactions that involve the business obtaining the goods or services necessary to make sales. Purchases may be made with cash or using accounts provided by the supplier of the goods or services. This type of financial transaction is recorded in the accounts payable of the business.
- Receipts are the financial transactions caused by the business getting paid for supplying goods or services to another business.
- Payments are the financial transactions that refer to a business paying to another business for receiving goods or services.
What are the financial transaction cycles in accounting?
A transaction cycle is a set of interlocking financial transactions. Many financial transactions can be collated into a small number of transaction cycles. The main transaction cycles relate to customer sales, supplier payment, payroll expenditure, and financier payments.
- Sales transaction cycle. Includes the financial transactions of shipping goods or providing services to the customer, issuing an invoice, and collecting payment.
- Purchasing transaction cycle. Includes the financial transactions of receiving goods and services, recording the transaction in the account payable, and paying the supplier.
- Payroll transaction cycle. Includes the financial transactions of calculating and recording gross pay, deducting and paying employee taxes, paying employees net pay and employee superannuation or insurance.
- Financing transaction cycle. Includes the receipt of money via a debt instruments, a series of periodic interest payments and debt repayments. Financial transactions in this cycle may also include cash receipts from investors and dividend payments.
Where can I find more information about the financial transaction in accounting?