Transactions

Whenever something happens within a company that has a monetary effect, it is called a transaction. A transaction is the process whereby value is transferred between parties.

Every time a transaction takes place, the BAE changes. Since the BAE must always be in balance, at least two of the three elements of the equation changes with each transaction, or one element changes twice.

Transactions can be divided into cash- and credit transactions, while some are simply book entries e.g. depreciation.

Transactions could also be divided between those that result in cash inflow for the company (either immediately or at a later stage) or cash outflow (either immediately or at a later stage).

Examples of transactions:

• Issue of shares by a listed company
• Buying clothing from a factory by a retailer
• Renting office space
• Buying computer equipment
• Paying salaries and wages
• Selling products for cash
• Borrowing funds and buying a factory
• Rendering services on credit
• Credit transactions

When goods or services are sold on credit, the following results:

• The selling price represents an income for the business
• A debtor is created for the money owed to the business
• Debtors are short-term assets of a business

When goods or services are purchased on credit, the following results:

• The purchase price represents an expense (or asset – see later) for the business
• A creditor is created for the amount owed by the business
• Creditors are short-term liabilities of a business (shorter than 12 months)

A peculiar thing happens when goods held in stock are sold; two transactions are taking place at the same time:

• The money received increases the asset cash while the selling price represents income.
• The item sold decreases the asset stock while the cost price of the stock represents an expense called “cost of sales”.