Business Transactions and Their Classification

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 27, 2021

Business Transactions: Definition

A transaction (also termed a business transaction or financial transaction) refers to an exchange of value. In business, a transaction is an exchange of goods or services at a particular price.

Every transaction changes the financial position of a business. For this reason, all transactions must be recorded in the books of accounts.

Examples

Examples of transactions include the payment of salaries to workers, the purchase of merchandise from a supplier on credit, or the purchase of machinery for cash.

Classification/Types of Business Transactions

Business transactions can be classified as follows:

  1. Cash and credit transactions
  2. Internal and external transactions

A brief explanation of each type, along with examples, is given below.

Cash Transaction

When cash is paid or received at the time of a transaction, the transaction is called a cash transaction. Importantly, when payments are made using credit cards or checks, these are also considered cash transactions.

Examples of cash transactions include the purchase of furniture for cash, the sale of merchandise for cash, and making a payment to a creditor by check.

Credit Transaction

When the payment or receipt of cash is not made immediately at the time of the transaction, and is instead postponed until a future date, the transaction is said to be a credit transaction.

Paper Transaction

When there is no question of meeting the value of a transaction, it is called a paper transaction. Examples of paper transactions include goods or cash lost.

Internal Transaction

A transaction that is not directly related to an outsider or an external party is called an internal transaction.

Examples of internal transactions include recording depreciation on a fixed asset, recording the loss of merchandise by fire, and the provision of goods and services to another business unit.

External Transaction

A transaction in which an outsider or external party is involved is known as an external transaction. Most transactions that a business makes during an accounting period are external transactions.

Examples of external transactions include the purchase of merchandise from a supplier, payment of cash to a creditor, and payment of salary to a worker.

Exercises

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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