Business transaction definition

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What is a Business Transaction?

A business transaction is an economic event with a third party that is recorded in an organization's accounting system. Such a transaction must be measurable in money. Once a business transaction has been recorded, it will flow through the accounting system and appear in a firm’s financial statements.

Examples of Business Transactions

Several examples of business transactions are as follows:

Sales Transactions

  • Selling goods to a customer for cash. This results in the receipt of cash and the transfer of goods to the customer, along with the recognition of revenue and a related cost of goods sold.

  • Selling goods to a customer on credit. This results in the creation of an invoice and the transfer of goods to the customer, along with the recognition of revenue and a related cost of goods sold.

Purchase Transactions

  • Buying insurance from an insurer. This results in an expenditure of cash or an account payable, and the creation of a prepaid expense, which is an asset.

  • Buying inventory from a supplier. This results in the expenditure of cash or an account payable, and the receipt of inventory or merchandise from the supplier.

Payment Transactions

  • Paying wages to employees. This results in the payment of cash to employees and the recognition of expenses for compensation and payroll taxes.

  • Paying taxes to a government entity. This results in the payment of cash to government entity and the recognition of an expense. An example is the payment of income taxes.

Receipt Transactions

  • Obtaining a loan from a lender. This results in the receipt of cash and the recognition of an obligation to pay back the money.

  • Selling shares to an investor. This results in the receipt of cash and the recordation of stock ownership by the investor.

Related Course

Accountants’ Guidebook

Bookkeeping Guidebook

Recordation of Business Transactions

High-volume business transactions may be recorded in a special journal, such as the purchases journal or sales journal. Once business transactions are entered into these journals, they are periodically aggregated and posted to the general ledger. Lower-volume transactions are posted directly to the general ledger. These transactions are eventually summarized into the firm's financial statements.

Source Documents

A business transaction should always be supported by a source document. For example, the purchase of inventory from a supplier could be supported by a purchase order, while the payment of wages to an employee could be supported by a timesheet.

Events Not Considered Business Transactions

Some events are not considered business transactions, such as giving a reporter a tour of company facilities, since there is no tangible value associated with the event.