Accounting Transactions

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Accounting Transactions Definition

An Accounting Transaction is a business activity or transaction that has a monetary impact on a company's financial statements. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. Recording such transactions is based on the fundamental accounting equation: Asset = Liabilities + Equity.

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Accounting Transaction Examples

Example #1

Kathy owns a florist shop, and to expand her business with deliveries, she bought a second-hand delivery van worth $30,000. She made the cash payment to the seller. Note the entries in her book of accounts.

Solution:

Accounting Transactions Example1

Example #2

With the same example, consider Kathy hired an employee on January 1st, 2019, on a monthly salary payable of,000 on the 1st day of the next month. She made total sales of $30,000 in January. However, her customers paid only $22,000 in cash (including $6,000 as advance payments), and $8,000 was to be received from them after deliveries in February. Can you help Kathy record these transactions in her books of accounts for January?

Solution:

Let's see what entries we can make for Kathy:

Accounting Transactions Example2

*To be realized by payment in Cash on February 1st.

Types

There are two types of Accounting Transactions - Internal and External Transactions.

Accounting Transaction

External Transactions: These kinds of transactions occur between two companies or organizations. Buying a good or raising debt from creditors is an example of External Transactions. Since this is an intercompany transaction; hence, it involves monetary or asset exchange.

If a company buys a fixed asset, usually, it does not account for the total value of an asset as an expense even though the company has bought that asset in cash upfront. Below will be accounting for an asset that has been purchased upfront.

Fixed Asset(debit) $100,000
Cash (credit) $100,00

The above journal entry is an external accounting transaction example.

Internal Transactions: These involve the process within the organizations, for example, by reducing the value of an asset by depreciating it year on year.

Once, the firm has bought the asset, it will depreciate its value in each period, and only that depreciation amount will be treated as an expense in the income statement. So after one-year journal entry of that Asset depreciation will be like below:

Fixed Asset $100,000
(-) Depreciation $10,00
Net Fixed Asset$ 90,000

This $10,000 will flow into the income statement before EBIT as an expense. Since this entry is only an accounting entry but not the actual money transfer, it is known as Internal Transaction.