There are 2 types of business transactions in general, namely, exchange and non-exchange transactions. Exchange transactions are said to happen when there is a physical exchange of goods and services between the 2 parties. Exchanges such as purchasing, selling, collection of receivables and payment of accounts fall under this category. On the contrary, non-exchange transactions do not involve physical exchanges but there is a chance of monetary exchange for a particular loss. For example, the losses paid towards the accidental damages of goods, wear and tear of equipment, damage due to fire, typhoon etc. A business and transactions are inseparable. In a given accounting system there must be a record of all business transactions based on the standards set by the firm. Records that don’t fall under non-monetary transactions cannot be called true business transactions. In a true sense, a business transaction affects the financial position of the firm. So, a business transaction is defined as “An activity or event that can be measured in terms of money and this has a direct influence on the financial position or operations of the business entity”.
Characteristics of a business transaction
In order for a transaction to become business-related then it must comply with the following conditions.
1. Transaction must involve the business entity`s debit, credit
2. Have a dual or "two-fold" effect on the accounting elements( receive-give OR debit-credit)
3. Must have a source document to support the transaction. Some example of a business transaction is as follows
A. Mr. PQRS Installed a new manufacturing plant to his industry worth of INR 1, 00,000.
B. Bonus of 250 rupees paid to Ms. XYZ.
C. Cleared outstanding debt of 2,0000000 to a partner company to employees
Types of business transactions
Cash and credit transactions
A transaction in which there is an exchange of a good or service for a sum of cash. Transaction can be made out of liquid cash or an online cash transaction. For instance, Mr. ABC paid INR 5,000 towards the purchase of a wheelchair, in this case, there is immediate action from both ends. In other words, Mr. ABC paid some money to Mr. XYZ to exchange the wheelchair on the spot.
On the other hand, in a credit transaction, there is a delay or time gap between the service/product being sold and the money being collected. For example, you buy some fancy gifts from your vendor for 4,000 INR with an agreement that you will pay his money after 15 days. In this case, there is a time gap of 15 days between the purchase and cash payment.
Concept of source documents in accounting
Source documents serve the evidence of what, where, when and how of the transaction. A complete source document must have the following elements:
1. A complete description of the nature of a business transaction, parties involved with their details.
2. Exact time, date and the amount of the transaction happened.
3. An authorizing signature
4. A Quantitative field (number of hours, the quantity of goods, etc)
5. In some departments, source documents are stamped by the concerned person or the person in charge.
Importance of source documents in accounting
A. Source documents avoid unnecessary man-made errors like forgetting, entering false information, over-representation of findings.
B. They serve as the basis for calculating balance sheets, credit, income, loss, taxes payable to the income tax department and auditors.
C. The source documents are essential for book-keeping and the whole accounting process because they provide evidence of a complete financial transaction that has occurred over a period of time.
D. Most importantly, they serve legal purposes at the time of crisis.
D. Some of the major source documents are cancelled cheque, credit memo, deposit slip, expense report, cash receipt, invoice, purchase orders, material requisition form, and DD.