October 19, 2020

SB-Accounting

Accounting + Finance Blog

Four (4) classification (types) of business transactions

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Earlier, the definition of business transactions was explained. As if that is not enough, a detailed look at the classification or types of business transactions will be elaborated on this lesson. Business transactions are an important aspect of every business. Without it, a business may not know it’s position at a particular period of time. Note that all business transactions must be accompanied by a source document.

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Types of business transactions

There are majorly two types of business transactions. However, this can further be broken down into four divisions or classifications.

1. Cash and credit transactions
2. Financial and nonfinancial transactions
3. Qualitative and quantitative transactions
4. Internal and external transactions

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Cash and credit business transactions: Cash transaction is a transaction in which an exchange of value is made immediately. Exchange of value might be

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1. Goods/services for cash,
2. Goods/services for Cheque/bank draft
3. Goods/services for cryptocurrency such as Bitcoin.

In such transactions, the payment is made immediately. That is, the payment for the goods is not agreed on another date.

Credit transactions, however, is the exchange of value that allows payments to be deferred or postponed to a later date.

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Financial and nonfinancial transactions: financial business transactions are those transactions that involve the use of money. Cash and credit transactions are financial transactions. This is so, as money is required in the exchange for goods or services.

On the other hand, nonfinancial transactions involved the aspect of a transaction that money is not attached to it. For example, the name of a customer who purchases goods.

Qualitative and qualitative transactions: Qualitative transactions are similar to nonfinancial transactions in some way. However, in the context of the International Financial Reporting Standard IFRS conceptual framework, the qualitative character of a business transaction or in this case, a financial statement, implies that such transaction or statement must be useful. The transaction must be presented in a faithful and relevant manner. It should be timely, understandable, verifiable and comparable. All the above will be explained in a future lesson.

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Quantitative business transactions are transactions that can be recorded in numbers, figures or monetary terms. It is similar to financial transactions. The difference is that some transactions may not invoice money. For example, the number of vouchers processed by a cashier in a restaurant.

Internal and external transactions: Internal transactions are transactions that do not involve the exchange of value. It usually takes place within the organization. However, salaries paid to workers of a business are not internal transactions. An example is the depreciation of fixed assets, loss allowance of loans in a commercial bank, among other things.

Eternal transactions involve the exchange of value. All cash and credit transactions are external transactions. Something is given in exchange for another thing. The external transaction usually includes the business and outsiders or it’s the environment. Such as customers and suppliers.

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In the next lesson, the definition of account, not accounting, will be examined.

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