3. What is a Business Transaction?
Business transactions refer to activities
and events that affect the financial
position of a business and are capable of
being assigned monetary values.
Business transactions are recorded in the
books of the business and summarized in
financial reports.
4. Characteristics of Business
Transactions
A business transaction must have the following
characteristics:
It must be for a sum certain in money (i.e., of a financial
value)
It must be supported by a source document (e.g. sales
invoice, official receipt, disbursement voucher, remittance
advice, etc.)
It must have a two-fold effect in the elements of
accounting.
5. A business transaction can either be
an exchange transaction (involves
physical exchange of values such as
sale, purchase, payment, etc.) or a non-
exchange transaction (does not involve
physical exchange (e.g. loss from flood,
fire loss, internal production,
depreciation, etc.)
6. 1. Investment of cash or other assets by the owners
2. Withdrawal of cash or other assets by the owners, and
distribution of dividends
3. Borrowing of cash from other entities for business use
4. Payment of borrowings
5. Sale of goods or services (either for cash or on
credit/account)
Examples of Business Transactions
7. 6. Collection of receivables from customers and other
entities
7. Acquisition of assets or services (either for cash or
on credit/account)
8. Payment of payables to suppliers or other entities
9. Consumption or expiration of assets (such as use of
office supplies and expiration of insurance, expiration of
rent, depreciation of equipment, etc.)
8. (Same with No. 7) Purchasing goods and materials. Purchases can be for cash or credit. Cash purchases
are paid for immediately and are fairly rare in most businesses. Credit purchases are paid for after
some time, typically a month or so.
(Same with No. 7) Purchasing services, for example, repair s to equipment, advertising, printing costs.
(Same with No. 5) Sales. Cash sales, for example in shops, are paid for immediately. Credit sales are
paid for after some time.
(Same with No. 8) Paying wages and salaries.
(Same with No. 1&7) Purchase of non-current assets. (noncurrent assets include investments in other companies,
intangible assets such as goodwill, brand recognition and intellectual property, and property, plant and equipment.)
(Same with No. 1) Raising finance and paying rewards to the suppliers of finance. For example, owners
putting in capital or loans being raised from banks. Owners of the business expect rewards based on a
share of the profit; banks usually expect interest to be paid.
(Same with No. 8) Accounting for and paying tax.
Movements of cash and money in the bank account. These movements usually arise from the
transactions above.
9. Two-Fold Effect on the Elements of Accounting
Every business transaction has a two-fold
effect in the elements of accounting. The
elements of accounting are assets,
liabilities, and capital. The two fold-effect
means that for every value received,
there is an equal value given.
10. Business Transactions and the Accounting
Equation
The two-fold effect of business transactions keeps
the accounting equation in balance. Assets should
always be equal to liabilities plus capital. To illustrate,
here are some examples.
11.
12. In each of the transactions above, the
accounting equation stays in balance.
Expenses and withdrawals made by
owners decrease capital, hence they
are shown as deductions from capital.
Investments of owners and revenues,
on the other hand, increase capital.
13.
14.
15.
16. Non-business Transactions
Non-business transaction is an activity or
event that may or may not involve money or
financial matters for as long it does not affects
the financial position or operations of the
business. Non-business transactions are
usually personal in nature like ‘personal
income’ or ‘personal expense’ incurred
personally by the individuals in the
organization.
17. 1. Purchasing goods & services for personal use
either on cash or credit.
Samples of Non-business Transactions
18. General Ledger
A general ledger is a book or file that bookkeepers use to
record all relevant accounts. The general ledger tracks five
prominent accounting items: assets, liabilities, owner’s
capital, revenues and expenses. Each account is a two-
columned T-shaped table. The bookkeeper typically places
the account title at the top of the" T" and records debit
entries on the left side and credit entries on the right. The
general ledger sometimes displays additional columns for
particulars such as transaction description, date and serial
number. Transactions from the general journal post in
general ledger accounts, and then balances are calculated
and transferred from the general ledger to a trial balance.
19. A general ledger is the master set of accounts
that summarize all transactions occurring within
an entity. There may be a subsidiary set of
ledgers that summarize into the general ledger.
The general ledger, in turn, is used to aggregate
information into the financial statements of a
business; this can be done automatically with
accounting software, or by manually compiling
financial statements from the information in
a trial balance report (which is a summarization
of the ending balances in the general ledger).
20. The general ledger contains a debit and
credit entry for every transaction recorded
within it, so that the total of all debit
balances in the general ledger should always
match the total of all credit balances. If they
do not match, the general ledger is said to
be out of balance, and must be corrected
before reliable financial statements can be
compiled from it.
21. The general ledger is comprised of all the individual accounts
needed to record the assets, liabilities, equity, revenue, expense,
gain, and loss transactions of a business. In most cases, detailed
transactions are recorded directly in these general ledger accounts.
In some cases where the volume of transactions would overwhelm
the record keeping in the general ledger, transactions are shunted
off to a subsidiary ledger, from which just the account totals are
recorded in a control account in the general ledger. In the latter
case, a person researching an issue in the financial statements must
refer back to the subsidiary ledger to find information about the
original transaction. The general ledger is usually printed and stored
in an organization's year-end book, which serves as the annual
archive of its business transactions.
22. General ledger accounts are assigned unique
identifying account numbers. These numbers
may range from a simple three-digit code to a
more complex version that identifies
individual departments and subsidiaries.
The general ledger is also known as the book
of final entry.
23. General Ledger Account
A general ledger account is a record in which is recorded a
specific type of transaction. These transactions can relate
to assets, liabilities, equity, sales, expenses, gains, or
losses - in essence, all of the transactions that are
aggergated into the balance sheet and income statement.
A separate general ledger account is set aside for each
specific type of transaction. For example, within the
general area of inventory assets, there may be separate
general ledger accounts for raw materials inventory, work-
in-process inventory, finished goods inventory, and
merchandise (purchased) inventory.
24. Examples of other general ledger accounts that are commonly used are:
Balance Sheet Accounts
Cash
Accounts receivable
Marketable securities
Fixed assets
Accumulated depreciation
Accounts payable
Accrued liabilities
Sales taxes payable
Debt
Common stock
Retained earnings
25.
26. Income Statement Accounts
Sales
Cost of goods sold
Compensation expense
Payroll tax expense
Fringe benefits expense
Rent expense
Utilities expense
Advertising expense
Travel and entertainment expense
Business insurance expense
Office supplies expense
Interest expense
Gain/loss on sale of assets
27. A complete list of all general ledger accounts that a
company uses is contained within the chart of accounts,
which is a simple listing of account numbers and account
descriptions.
A few general ledger accounts are designated as control
accounts. These accounts only contain summary balances
that have been posted from subsidiary ledgers. This is
done in order to minimize the transaction volume
cluttering the general ledger. The accounts receivable and
accounts payable accounts are the most likely to be
control accounts.