Description of a Business Transaction
Examples of accounting transactions are:
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
are the building blocks of our accounts. Any transactions that occur
within our business should be present in our accounting records.
are many different types of transactions to keep track of such as
sales, purchases, and even more. A regular point of confusion that we
come across when we talk to small businesses about their accounts is the
difference between cash and credit transactions. So, what is the
The only difference between cash and credit
transactions is the timing of the payment. A cash transaction is a
transaction where payment is settled immediately. On the other hand,
payment for a credit transaction is settled at a later date.
not to think about cash and credit transactions in terms of how they
were paid, but rather, when they were paid. For example, you may buy
some groceries at your local shop and pay for them in cash there and
then, that’s a cash transaction. However, what if you paid by card
rather than cash? That can also be classified as a cash transaction
because you paid immediately.
On the other hand, credit
transactions are paid at a later date than when the exchange of goods or
services took place and almost all of time an invoice for the
transaction is issued. The time period before payment can vary depending
on the types of businesses or even the industry in which the
transaction is taking place. Once again, when payment is finally settled
for the invoice, it may be done with cash or card, or any other payment
method but it is still a credit transaction.
have a mixture of cash and credit transactions make up their accounting
records. Some businesses may have the majority of their transactions be
either one or the other and some will have a more even split. However,
you would be hard pressed to find a business that didn’t have at least
one cash or credit transaction occur during its lifetime.
with whether a transaction is classified as cash or credit another
category is used to classify basic accounting transactions. We also need
to know whether or not it is a sale, purchase or payment. This gives us
a list of basic transactions:
1. Cash sale
these, like cash and credit sales as well as credit purchases are more
common that the others but depending on what type of transaction we
have, we can find a home for it in our accounts.
refer to resources owned and controlled by the entity as a result of
past transactions and events, from which future economic benefits are
expected to flow to the entity. In simple terms, assets are properties or rights owned by the business. They may be classified as current or non-current.
A. Current assets
– Assets are considered current if they are held for the purpose of
being traded, expected to be realized or consumed within twelve months
after the end of the period or its normal operating cycle (whichever is
longer), or if it is cash.
Examples of current asset accounts are:
Cash and Cash Equivalents – bills, coins, funds for current purposes, checks, cash in bank, etc.
– Accounts Receivable (receivable from customers), Notes Receivable
(receivables supported by promissory notes), Rent Receivable, Interest
Receivable, Due from Employees (or Advances to Employees), and other
Inventories – assets held for sale in the ordinary course of business
Prepaid expenses – expenses paid in advance, such as, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, and Office Supplies
B. Non-current assets
Hence, they are long-term in nature – useful for a period longer that 12
months or the company’s normal operating cycle. Examples of non-current
asset accounts include:
investments – investments for long-term purposes such as investment in
stocks, bonds, and properties; and funds set up for long-term purposes
Land – land area owned for business operations (not for sale)
Building – such as office building, factory, warehouse, or store
– Machinery, Furniture and Fixtures (shelves, tables, chairs, etc.),
Office Equipment, Computer Equipment, Delivery Equipment, and others
Intangibles – long-term assets with no physical substance, such as goodwill, patent, copyright, trademark, etc.
Other long-term assets
• Accumulated Depreciation
– This is a valuation account which represents the decrease in value of
a fixed asset due to continued use, wear & tear, passage of time,
and obsolescence. It is a contra-asset account and is presented as a deduction to the related fixed asset.
assets come from 2 major sources – borrowings from lenders or
creditors, and contributions by the owners. The first refers to
liabilities; the second to capital.
A. Current liabilities
– A liability is considered current if it is due within 12 months after
the end of the balance sheet date. In other words, they are expected to
be paid in the next year.
the company’s normal operating cycle is longer than 12 months, a
liability is considered current if it is due within the operating cycle.
Trade and other payables – such as Accounts Payable, Notes Payable, Interest Payable, Rent Payable, Accrued Expenses, etc.
Current provisions – estimated short-term liabilities that are probable and can be measured reliably
Short-term borrowings – financing arrangements, credit arrangements or loans that are short-term in nature
Current tax liabilities – taxes for the period and are currently payable
Current-portion of a long-term liability – the portion of a long-term borrowing that is currently due.
– Liabilities are considered non-current if they are not currently
payable, i.e. they are not due within the next 12 months after the end
of the accounting period or the company’s normal operating cycle,
whichever is shorter.
- Long-term notes, bonds, and mortgage payables;
- Deferred tax liabilities; and
- Other long-term obligations
- Initial and additional contributions of owner/s (investments),
- Withdrawals made by owner/s (dividends for corporations),
- Income, and
terms used to refer to a company’s capital portion varies according to
the form of ownership. In a sole proprietorship business, the capital is
called Owner’s Equity or Owner’s Capital; in partnerships, it is called Partners’ Equity or Partners’ Capital; and in corporations, Stockholders’ Equity.
addition to the three elements mentioned above, there are two items
that are also considered as key elements in accounting. They are income and expense. Nonetheless, these items are ultimately included as part of capital.
to an increase in economic benefit during the accounting period in the
form of an increase in asset or a decrease in liability that results in
increase in equity, other than contribution from owners.
is measured every period and is ultimately included in the capital
account. Examples of income accounts are: Service Revenue, Professional
Fees, Rent Income, Commission Income, Interest Income, Royalty Income,
are decreases in economic benefit during the accounting period in the
form of a decrease in asset or an increase in liability that result in
decrease in equity, other than distribution to owners.
such as Loss from Fire, Typhoon Loss, and Loss fromTheft. Like income,
expenses are also measured every period and then closed as part of