Accounting transaction definition
/What is an Accounting Transaction?
An accounting transaction is a business event having a monetary impact on the financial statements of a business. It is recorded in the accounting records of the business.
Examples of Accounting Transactions
Examples of accounting transactions are as follows:
Sale in cash to a customer
Sale on credit to a customer
Receive cash in payment of an invoice owed by a customer
Purchase fixed assets from a supplier
Record the depreciation of a fixed asset over time
Purchase consumable supplies from a supplier
Investment in another business
Investment in marketable securities
Engaging in a hedge to mitigate the effects of an unfavorable price change
Borrow funds from a lender
Issue a dividend to investors
Sale of assets to a third party
Fraudulent Accounting Transactions
There can be fraudulent accounting transactions that are essentially made up by management or the accounting staff. They may create these transactions in order to make the financial results of their business appear better than is actually the case. There are several reasons for engaging in this type of fraud, including reaching profit targets that will result in bonus payouts, and showing results that exceed the covenants included in a loan agreement.
These transactions can be avoided through the use of a comprehensive system of controls.
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Impact of the Accounting Equation on Accounting Transactions
Every accounting transaction has to follow the dictates of the accounting equation, which states that any transaction must result in assets equaling liabilities plus shareholders' equity. For example:
A sale to a customer results in an increase in accounts receivable (asset) and an increase in revenue (indirectly increases stockholders' equity).
A purchase from a supplier results in an increase in expenses (indirectly decreases shareholders' equity) and a decrease in cash (asset).
A receipt of cash from a customer result in an increase in cash (asset) and a decrease in accounts receivable (asset).
Borrowing funds from a lender results in an increase in cash (asset) and an increase in loans payable (liability).
Thus, every accounting transaction results in a balanced accounting equation.
How to Record an Accounting Transaction
Accounting transactions are either directly or indirectly recorded with a journal entry. The indirect variety is created when you use a module in the accounting software to record a transaction, and the module creates the journal entry for you. For example, the billing module in the accounting software will debit the accounts receivable account and credit the revenue account every time you create a customer invoice.
If a journal entry is created directly in a manual accounting system, verify that the sum of all debits equals the sum of all credits, or the transaction will be unbalanced, which makes it impossible to create financial statements. If a journal entry is created directly in an accounting software package, the software will refuse to accept the entry unless debits equal credits.