Alright, this time we need to define transaction on our way to present the simplest accounting dictionary. In our daily life, we perform many transactions like when we go to the grocery store to buy some grocery or when are paying online for some application. Transactions are part of our life, but how exactly do you answer when someone asks you “What is a transaction?”. You don’t know yet? Well, this is why google landed you here on this page.
What is a Transaction
As usual, Sacred Accounting is bringing you definitions from the most authoritative resources in the simplest way possible. The thing to note here is that no definition is final, you are right in each of the five cases.
- An activity or an occasion of buying or selling something or the exchange of money is called a transaction. (Cambridge Dictionary)
- An agreement where goods, services are exchanged is called transaction. This agreement is between a buyer and a seller. (Investopedia)
- Any event that leads to a change in the asset, liability or net worth is called a transaction. A transaction might affect all these (assets, liabilities and net worth) at the same time or any one/two of these. (Business Dictionary)
- An exchange of goods, services or funds is called transaction. This exchange is usually between a buyer and a seller. (Merriam Webster)
- An interaction between a seller (the business) and a customer (the buyer) or a supplier is called a transaction.
Meaning of Transaction
Transaction means to transact (transact in term is the exchange of goods or services).
Examples of Transactions
- Sales of Goods and Services for Cash or Credit.
- Subscribing to a Netflix Premium plan (there is an interaction between you (the buyer) and Netflix (the Seller)
- Purchase of inventory on cash or credit.
- Purchase of an asset.
- Disposal of an asset.
- Payment of salaries to employees.
- Classification of Transactions
Types of Transactions
Transactions can be classified into three different categories:
- Simple and complex transactions,
- One-off and ongoing transactions, and
- Capital and revenue transactions.
We will discuss these in detail:
Simple and Complex Transactions
A transaction is simple where a buyer sells goods and services and the buyer pays for it immediately in cash. A simpler transaction becomes complex when the buyer buys something in a credit or qualifies for a discount.
Example: When you purchase an AC from an electronic store and pays for it at the same time. This is a simple transaction, however, if you buy this AC on credit and agrees with the seller to pay him in installments, this transaction becomes a complex.
One-off and ongoing transactions
A transaction occurring on a single occasion is called one-off transaction. Whilst, an Ongoing transaction is a transaction of continuing nature. An ongoing transaction consists of a series of transactions.
Example: Suppose you buy a smartphone and pay for it upfront, it is a one-off transaction whilst if you subscribe to software via a monthly plane, you’re in fact incurring a series of transaction, that is what we call ongoing transactions.
Capital and Revenue Transactions
A transaction that has a long-term effect is called capital transactions, whilst day to day transactions are called revenue transactions. As a business, you might purchase some machinery. This machinery can be used for a long time (4-6 years), therefore such a transaction is called capital transaction. Similarly, you might purchase some inventory on a daily basis, as such transactions are incurred daily, they are called revenue transaction.
You might notice here that the classification of transactions into three types are based on different criteria such as:
Simple and complex Transactions– This classification is based on the nature of the transaction.
One-off transaction and ongoing transactions– This classification is based on the number of times a transaction is occurring. (The frequency of transaction)
Capital and Revenue transactions– this classification is made entirely on the effect that a can be derived from a particular transaction over a period of time. If a transaction has a long-term benefit, we name it as a capital transaction whilst if a transaction has a short-term benefit, we call it a revenue transaction.