Definition: An accounting transaction, also called a business event, is any exchange of economic consideration that can be reasonably measured and affects the firm’s financial position. In other words, transactions are events that change the accounting equation during a period. If assets, liabilities, or equity are changed or affected, chances are there is a transaction of some kind.
What Does Transaction Mean?
Notice that I said in order for a transaction to exist, it must be reasonably measurable. Any business event that can’t be measured is not considered a transaction because we don’t record events based on pure estimates. Some type of substantial measurability needs to exist in order to consider it a transaction.
For example, natural disasters that destroy large amounts of equipment and adjustments to the fair value of some assets are recorded as transactions because they can be reasonably measured and affect the accounting equation.
Signing of business contracts, on the other hand, don’t change the accounting equation, so they are not usually recorded as a transaction.
Generally, there two main types of transactions: internal and external. Internal transactions happen within the company. It’s essentially the business buying or selling something to it self. A good example of an internal transaction is interdepartmental exchanges of assets. For instance, the shipping department might need office supplies from the clerical department. Rather than going to Staples, the shipping department just uses the clerical department’s supplies. These “purchases” are simply recorded as expenses once on the income statement just like any supply purchase.
An external transaction is an exchange between the company and another entity. Buying goods from a third party vendor is a good example of an external transaction.
Each transaction is recorded in the accounting system by a general journal entry.