Business Transaction: Definition, Types, And Examples

Business transactions are a crucial aspect of every business. Without it, a business may not know its position at a particular period of time. This article will give you a formal definition of a business transaction, its different types, and examples of typical business transactions. 

1. What is a business transaction?

In accounting, a business transaction (also known as a financial transaction) is an event that must be measurable in terms of money and impacts the business’s financial position. It can also be defined as any monetary activity that occurs in a business. All business transactions must be accompanied by a source document. 

For instance, if you run a merchandising business and sell goods to a customer for $1000 cash, you can measure this event in terms of money and impact to your business’s financial position. So it’s a valid business transaction. Similarly, suppose you pay $500 in cash to your salesman as his pay. In that case, this event is also a transaction because it has a monetary value of $500, making a financial impact on your business. Only those events that can be measured in monetary terms are included in the business’ accounting records. 

There are numerous events related to a business to which we can’t reliably assign a monetary value. Such events can’t be called business transactions or financial transactions. For example, when a company CEO delivers a motivational speech to the employees, though this event may be of great benefit to the business, we can’t assign a monetary value to it. So it isn’t a business transaction and can’t become a part of accounting records.  

Each business transaction must be recorded by making a journal entry by the bookkeeper or accountant. Since each transaction impacts the business’s financial position, the bookkeeper or accountant must make sure that a responsible person has authorized it. 

See also: Bookkeeping For Entrepreneurs Best Practices.

One or more source documents must support a valid business transaction before being recorded to the journal. Typical examples of source documents are sales invoices, purchase invoices, cash receipts, payment vouchers, statement of accounts, bills of exchange, promissory notes. Basically, any other document containing the basic transaction details can be presented as proof of valid transaction.

2. Characteristics of a business transaction

A business transaction can be an exchange transaction (which involves physical value exchange such as purchase, payment, etc.) or a non-exchange transaction (which does not involve physical exchange, such as fire loss, flood loss, internal production, depreciation, etc.). A business transaction can be as simple as a cash purchase or as complex as a long-term service contract. However, a business transaction must include the following characteristics: 

  • The transaction must be for a certain sum of money
  • The transaction occurs between two parties
  • The transaction is on behalf of the business entity
  • The transaction isn’t for any individual person’s purpose
  • The transaction must be supported by authorized legitimate documents (sales invoice, official receipt, disbursement voucher, remittance advice, etc.)
  • The transaction must have a two-fold effect on the elements of accounting.

3. Main types of business transactions

In accounting, there are two ways to classify business transactions: cash and credit transactions or internal and external transactions. 

Cash and credit transactions

Cash transaction: In a cash transaction, the payment was paid or received in cash at the time the transaction occurred. For example, suppose you purchase a new shirt from a store and pay at checkout, a cash transaction happens between you and the store. Even if you made the payment with a credit card, as long as it was a payment in-full at the time of purchase, it is still considered a cash transaction because the payment is made when the transaction occurs. In the modern business world today, cash transactions are not limited to currency notes for making or receiving payments. All transactions made using debit or credit issued by financial institutions are also categorized as cash transactions.

Credit transaction: A transaction is classified as a credit transaction when the payment is made after a set period of time, also called the credit period. In other words, the payment is received or paid at a future date. For example, when you purchase a couch from a furniture store, the store allows you to pay within the next 30 days instead of paying at the time of the transaction. Though cash isn’t involved at the time of sale, you will need to pay to the couch after a set period of 30 days. In the business world today, goods are mostly purchased and sold on credit. 

Internal and external transactions

Internal transaction: When there is no external party involved in a business transaction, it’s classified as an internal transaction. Even though there is no value exchange with a third party, a monetary event has taken place that impacts the business’s accounting. An internal transaction can be in the form of depreciation on a fixed asset or loss of assets. The internal transaction is also known as a non-exchange transaction.  

External Transaction: An external transaction is sometimes called an exchange transaction. This transaction occurs when two or more parties are involved in the transaction. These are daily occurring transactions such as purchasing goods, paying rent or utilities, or paying employees. Normally, a large portion of business transactions consists of external transactions. 

4. Examples of business transactions

Let’s take a look at some common business transactions: 

  • Sales of goods and services (either for cash or credit);
  • Purchasing of goods and materials (either in cash or credit);
  • Purchasing services (such as equipment repair, advertising, printing costs);
  • Investment of cash on other assets by the business owners;
  • Borrowing of cash for business purposes from other entities;
  • Withdrawal of cash or other assets, and distribution of dividends; 
  • Paying wages and salaries;
  • Accounting for and paying tax;
  • Collection of receivables from customers and other entities;
  • Payment of payables to the supplier or other entities;
  • Consumption or expiration of assets (e.g., the use of office supplies, the expiration of insurance, expiration of rent, depreciation of equipment, etc.);
  • Movements of cash in the bank account (which usually arise from the transactions above). 

Final thoughts

It’s important to understand your company’s role in a transaction. It affects everything from how you provide services to your customers to marketing, pricing, and more. Understanding thoroughly about these types of business transactions helps you make more informed decisions about the business. 

In most cases, companies have to work with multiple types of business transactions, and they need to keep track of them with numerous paperwork like invoices, receipts, and expense reports. If this sounds familiar to you, then you can consider digitizing your paper receipts and getting them into action. 

Shoeboxed is an outsourced receipt-scanning service that converts paper receipts into organized digital copies on your company’s behalf. You can scan your receipts with a single smartphone or mail them to any Shoeboxed facility to have them scanned and organized. Shoeboxed is the simplest way to keep track of your business transactions by turning your receipts into data. Get paper off your desks and keep your vital documents in a logical sequence for years with Shoeboxed!

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Career Profile: Everything You Need To Know About Bookkeepers

All over the world, most businesses by law must do bookkeeping. Bookkeeping records all financial transactions and systematically categorizes them, calculating the business’s exact income and expenses. In other words, bookkeeping is critical to your business’s success, but how much do you know about the profession that keeps you in the financial loop? Read on to find out the career profile of a bookkeeper!

What is a bookkeeper?

A bookkeeper is someone who records your daily business’s transactions and manages accounting ledgers. In essence, a bookkeeper keeps your finances in order. 

Responsibilities of a bookkeeper

So, does a bookkeeper only enter data into the accounting system? The answer is definitely no! Besides the main task of collecting and recording data, here are some other common roles a bookkeeper performs:

  • Bank reconciliation 

A bookkeeper double-checks whether the money leaving an account matches the actual money spent. 

With cash flow constantly changing and so much money coming in and out, it’s easy for errors to fall through the cracks. To avoid this, bookkeepers check and compare your recordings to documents provided by a third party (such as a bank, a credit card company, etc.) to ensure data is synced and accurate. In case there are any discrepancies, the bookkeeper will review and promptly correct them. 

  • Bills and invoices 

Bookkeepers can also take care of bills and invoices. This directly involves handling accounts receivable and accounts payable. Both of these responsibilities ensure that customers pay you (ideally on time) and that your bills are paid before the due date. 

An excellent tool that can help your bookkeepers to stay on top of these problems is Shoeboxed. Shoeboxed helps you categorize, digitize, and extract important data from your receipts in just a click. Every one of your bills and invoices will be well-organized and easy to find. Using Shoeboxed, your bookkeeper no longer needs to go through piles of paper to process a payment. 

You can sign up for free and let Shoeboxed save you time & money!

  • Payroll management 

Bookkeepers are sometimes in charge of payroll processing, as well. While the procedure may differ among businesses, the task typically entails verifying and calculating employees’ salaries, deducting taxes and other deductions, and then sending payment. 

As every business is different, the responsibilities of a bookkeeper vary across companies and industries. However, in every business, a bookkeeper should carry out excellent and systematic bookkeeping in order to manage finances better and achieve your company goals.

What skills does a bookkeeper need to master?

Here are some ideal qualities and proficiencies to look for when hiring for a bookkeeper: 

  • Excellent with numbers: All the tasks that a bookkeeper performs involve numbers. That’s why a bookkeeper has to be comfortable dealing with complex calculations. In certain circumstances, the nature of your business determines the level of numerical expertise. But there is no escape from numbers and calculation. So it’s best that your bookkeeper doesn’t get headaches whenever they see digits.
  • Extraordinary organizational skills: A successful bookkeeper is someone who’s well-organized. They’re responsible for recording each and every transaction, from supplier invoices to customer receipts. So if bookkeepers don’t know how to organize things, they’re likely to make mistakes and cause you financial damage. 
  • Good communication skills: A bookkeeper needs to be socially intelligent as they have to communicate with customers, suppliers, and colleagues to collect data. Plus, they should be able to speak in plain English, simplifying technical terms so that everyone can understand. 
  • Proficient skills in accounting software (optional): If your business doesn’t use an accounting program, this trait is totally optional. Otherwise, computer skills are essential as they can save you time when training, as well as ensure data entry will be accurate to avoid issues..  

Do bookkeepers need any qualifications?

In general, a bookkeeper doesn’t need any qualifications or license to perform their job. However, many organizations offer bookkeeping certificates. Though these certifications are not regulated by any state or federal office, it’s still a useful tool for you to seek the most suitable bookkeeper for your business. Below are two examples of common bookkeeping certifications:

  • American Institute of Professional Bookkeepers (AIPB): To earn AIPB certification, bookkeepers must have at least two years of full-time work experience, pass a national exam, and agree to follow the AIPB code of ethics. Through its assessment, the AIPB qualifies professionals in many areas like adjustments, error control, payroll, inventory management, internal controls, and fraud prevention. Additionally, bookkeepers need to engage in continuing education to maintain their accreditation. 
  • National Association of Certified Public Bookkeepers (NACPB): Bookkeepers can obtain different types and levels of NACPB certification and license. To get NACPB licensed, bookkeepers must have 2,000 hours of work experience, pass an exam and sign a code of conduct. They must complete 24 hours of continuing education each year to keep their license. 

What is the average salary for a bookkeeper?

The salary or hourly rates you’ll pay totally depend on your business’s nature and what it needs. That means you can determine the right compensation for your bookkeeper through these two factors: services/workload and expertise.

  • Services/workload: This is pretty straightforward as the more work you need bookkeepers to do, the more you have to pay them. For example, if you need someone to check the books once a month, it’ll cost less than hiring someone part-time to handle your daily operations. So, determine what tasks you need professional help with, estimate the time it might take them to finish, and then you can know if you need someone part-time, full-time, or on a project basis. From there, you can determine the cost to hire a bookkeeper. 
  • Expertise: If your accounting system is complex, you would want a certified or licensed bookkeeper. It can give you peace of mind and assurance that your money is in excellent hands, but it will definitely cost you more.

Visit recruiting websites to give yourself a good idea of how much it should cost in your company’s particular market. For instance, according to Indeed, bookkeepers’ average base salary is $38,615 per year and $18,94 per hour (based on 2021 statistics). 

Bookkeeper vs. Accountant

By and large, a bookkeeper mainly focuses on recording and organizing financial data. An accountant analyzes, interprets, and communicates those data to business owners and investors. 

Check out this article for detailed explanations: Accounting Vs. Bookkeeping: What Are The Differences? 

Final thoughts 

There is no reason for you to stay caught up in day-to-day tasks like recording data or organizing receipts. Hiring a bookkeeper is a wise investment that will help your company flourish. A dedicated bookkeeper can take care of your books and keep good track of your cash flow, freeing you up to devote more time to really grow your business. 

Want to streamline your bookkeeping process? Or improve accuracy? Shoeboxed has got you covered. 

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How To Have A Fantastic Shoeboxed Accounting With Minimal Spending

What is shoebox accounting?

Shoebox accounting is the practice of filling a symbolic shoebox with receipts, invoices, and other accounting documents so that an accountant can sort these out at the end of the accounting year.

In doing a weekly accounting check, have you ever asked yourself the following:

  • How much time do you spend on finding the physical receipts and business transaction records?
  • How much space do you spend on keeping these records? 
  • How much energy do you spend on keeping track of these transactions?
  • How much trouble do you go through at the end of the tax season to account your expenses? 

If your answer to those questions is quite a lot, I suggest you spend just 5 minutes to know how Shoeboxed services can solve all these problems for you and your business, applying the shoebox accounting method.

How does Shoeboxed accounting help you increase revenue? 

The shoebox accounting method can save business owners’ costs by reducing the stress of keeping accounting records. It gives business owners more time to concentrate on growing the business.

Why should you use a shoebox accounting specialized software? 

For the reason that a shoebox accounting software such as Shoeboxed reduces the risk of human errors and optimizes the efficiency of the automated accounting system. 

These are the most prominent features of Shoeboxed that make accounting a walk in the park for your business. 

  1. You can easily access all the data that you need without worrying about safekeeping the records. Because the Shoeboxed app scans important receipts and documents and safely stores them at a physical warehouse and in the cloud.
  2. You can have all key data extracted from your business records and organized in your account. At the click of a button, you can track all expenses and review scanned images of your receipts. 
  3. You can have all the expense reports simply organized and created catering to your own needs. You can choose to export all or part of your data at any time and have them beautifully downloaded in the format of PDF or CSV files. 

If you’re not sure whether Shoeboxed is a good fit for you, reach out to us at our support center! We’re happy give you a free demo and a trial use, completely free of charge.