- Define transactions
A transaction for financial accounting purposes is an economic event that has a monetary impact on the financial statements. Each monetary transaction is recorded in a journal, and the journal entries are then sorted by account and posted to a ledger. The ledger balances are transferred to the financial statements. Recall the monetary unit assumption that states that the amounts on the financial statements are monetary amounts, so in the United States, the amount of the transaction would be in U.S. dollars.
Because transactions are monetary events, they almost always produce some kind of supporting document. For instance, when a company purchases supplies, the supplier issues a receipt. Assume your company pays $2,000 for consulting services. This is an expense to the business and the invoice from the consulting firm is the documentation that supports the expense. Recall that expenses (an accounting transaction) are recognized (recorded) as incurred
Examples of transactions for a small, mom-and-pop grocery store:
- Collect cash from a customer in exchange for a product
- Pay a supplier for produce that will be sold in the store
- Place an advertisement in a weekly newspaper
- Pay employees to work in the store stocking shelves
Pay Cash for Inventory
Inventory is the term for goods held for sale in the ordinary course of business. In the grocery store, eggs are inventory. When the store buys milk from the supplier, the bookkeeper records the purchase of inventory in U.S. dollars and records the payment to the supplier as an expenditure in the check register. The supplier should provide a receipt. (By the way, for the supplier, this is a cash sale to a customer.)
Purchase a Display Case on Account
When the owner buys an asset, like a display case, the bookkeeper records the acquisition of the asset and a related debt. For a small purchase such as this it would be an Accounts Payable entry (generally 90 days or less). However, If it was a larger purchase, such as a piece of machinery where the seller finances it for a period of time the entry may be to Notes Payable instead of Accounts Payable.
Not every business event rises immediately to the level of an accounting transaction, even though it may fit the definition of a legal transaction.
For instance, assume the owner decides to hire you as a consultant and you both sign an agreement stating that, upon completion of the work, the owner will pay you $1,500. Although there is backup documentation and a dollar amount, there is no completed transaction for the bookkeeper to record, since the economic event occurs upon completion of the contract. In other words, if you don’t do the work, you don’t get paid, so the transaction is recorded when the work is done, even if the cash is paid in advance.