BUSSINESS COMMUNICATION MS.

CHACON

Business Transaction
Definition & Examples
A business transaction is an event involving an interchange of goods, money or
services between two or more parties. The transaction can be as brief as a cash
purchase or as long-lasting as a service contract extending over years. The business
transacted can be between two parties engaged in business and conducting the
transaction for their mutual benefits, or between a business entity, like a retail shop,
and a customer.

Definition and explanation

In accounting, the business transaction (also known as financial transaction) is
an event that must be measurable in terms of money and that essentially impacts
the financial position of the business. For example, you run a merchandising
business and you sell some goods to a customer for $500 cash; it is an event that
you can measure in terms of money and that impacts the financial position of your
business so it is a transaction. Similarly, you pay $400 cash to your salesman as
his pay. This event is also a transaction because it has a monetary value of $400
and it has a financial impact on your business. Only those events that can be
measured in monetary terms are included in accounting records of the business.

There may be numerous events related to a business to which we cannot reliably

assign a dollar value. Such conditions or events cannot be called business or
financial transactions. For example, the CEO of a company delivers a motivational
lecture to the employees. Undoubtedly, this event may be of great benefit for the
company’s business but we cannot assign a monetary value to it so it is not a
business transaction and therefore cannot become a part of accounting records.

Each transaction is recorded by making a journal entry by a bookkeeper or

accountant. Since each transaction impacts financial position of the business, the
bookkeeper or accountant must make sure that it has been authorized by a

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responsible person and is properly supported by one or more source

documents before recording it in the journal. A source document is a document that
provides basic information needed to record a transaction in the journal. Usual
examples of source documents include sales invoices, purchase invoices, cash
receipts, payment vouchers, statement of accounts, bills of exchange, promissory
notes and any other document containing the basic transaction details which can
be presented as a proof of valid transaction.

Characteristics of a BUSINESS
TRANSACTION
From above discussion, we can point out the following five important characteristics
of a valid business transaction that every bookkeeper or accountant must take care
of before entering the transaction in the journal.

1. It is a monetary event.
2. It affects financial position of the business.
3. It belongs to businesIIs not to the owner or any other person managing the
business.
4. It is initiated by an authorized person.
5. It is supported by a source document.

Types of business transactions

In accounting, the transactions may be classified as:

1. cash transactions and credit transactions

2. internal transactions and external transactions

(1) Cash and credit transactions

A transaction in which cash is paid or received immediately at the time when

transaction occurs is known as cash transaction. For example, you sell some
goods to Mr. John for $50 and Mr. John immediately pays $50 cash for the goods
purchased. It is a cash transaction because you have immediately received cash
for the goods sold to your customer. Similarly, you buy furniture for your business
for $750. You immediately pay $750 cash to the supplier and get the possession of
furniture. It is also a cash transaction.

In today’s modern business world, cash transactions are not limited to the use of
currency notes or coins for making or receiving payments, all transactions made
using debit or credit cards issued by financial institutions are also categorized as
cash transactions.

In a credit transaction, the cash does not change the hands immediately at the
time when transaction occurs. In other words, the cash is received or paid at a
future date. For example, you buy some merchandise from your vendor for $1,000.
Upon your request, your vendor agrees to receive the payment of $1,000 for goods
sold to you next week. You take the possession of the goods and transport them to

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your store. It is a credit transaction because you have not made the payment
in cash immediately at the time of purchase of goods. Similarly, you sell some
goods to Mr. Sam for $150. Mr. Sam requests you to receive the payment of $150
next month. You agree. Mr. Sam takes the goods to his home for use. This is also a
credit transaction because you have not received the payment in cash at the time
of sale of goods to Mr. Sam.

In today’s business world goods are mostly purchased and sold on credit.

(2) Internal and external transactions

Internal transactions (also known as non-exchange transactions) are those

transactions in which no external parties are involved. These transactions do not
involve in the exchange of values between two parties but the event constituting the
transaction is measurable in monetary terms and impacts the financial position of
the business. Examples of such transactions include recording depreciation of fixed
assets and realizing the loss of assets caused by fire etc.

External transactions (also known as exchange transactions) are transactions in

which a business exchanges value with external parties. Normally, all transactions
other than internal transactions are external transactions. These are the usual
transactions that a business performs on daily basis. Examples of external
transactions include purchase of goods from suppliers, sale of goods to customers,
purchase of fixed assets for business use, payment of rent to owner, payment of
gas, electricity or water bills, payment of salary to employees etc. Normally, a large
portion of transactions performed by any business consists of external transactions.

What's Not a Business Transaction?

There are any number of events conducted for commercial purposes that,
despite a commercial intent, are still not business transactions. For example, if
a well-known CEO gives a commencement speech, ultimately it benefits the
students as well as the CEO and his company. The students benefit from the
useful or inspiring contents of the commencement speech, while the CEO and
his corporation are publicized in the process.

There may even be some measurable bump in the company's stock price
associated with the favorable publicity, and it may be that the company's store
in the college town where the CEO gave the speech sees an increase in
quarterly sales. Even if there's a measurable commercial benefit derived from
the speech, however, it doesn't constitute a business transaction.

Why Are Some Things Not Business

Transactions?
There are many events that are clearly business transactions like purchases
of equipment or supplies for an ongoing business. Equally, there are many

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events that are clearly not commercial transactions such as writing someone a
love letter or making a donation of labor to a charity.

There are also transactions where it might seem you could call it either way,
like the CEO's speech that results in increased company sales in the college
town where it was given. Why, in this instance, would you not consider the
speech a commercial transaction? Well, for one thing, for an action to be
considered a commercial transaction, there needs to be a specific payment for
it – in accountant-speak, a remuneration.

There needs to be an exchange of value. If the CEO had been paid to deliver
the speech – and many CEOs and prominent business figures are regularly
paid for speech-giving – it would then be considered a commercial transaction,
an exchange of value (the speech and the payment for it).

A General Rule in Determining if it is a

Commercial Transaction
When determining whether an action is a commercial transaction, consider
whether there's a way of entering it in an accounting record. It's pretty clear
that if the person giving the speech is being paid for it, the payment needs to
be entered somewhere – either as additional income in the CEO's personal
tax records or as a taxable payment to the corporation. On the other hand, if
there's no straightforward way of entering the event into accounting records, it
almost certainly is not a commercial transaction.

What Is (CEO)? = Chief Executive Officer

A chief executive officer (CEO) is the highest-ranking executive in a company, whose primary
responsibilities include making major corporate decisions, managing the overall operations and
resources of a company, acting as the main point of communication between the board of
directors (the board) and corporate operations and being the public face of the company. A CEO
is elected by the board and its shareholders.

ENGLISH CONVERSATIONAL I Ms. Chacon.