What is Business Transaction?
A business transaction is a transaction with a third party that is recorded in an organization’s accounting system. Such a transaction MUST be measurable in money. This is where money measurement concept comes in which says that only monetary transactions should be recorded in the books.
Characteristics of Business Transactions:
A business transaction may have the following characteristics:
- It must be in exchange with money.
- It must be supported with a document (e.g. sales invoice, official receipt, disbursement voucher, remittance advice, etc.)
- It must have a two-fold effect with reference to accounting i.e. one transaction will have double effect. For e.g. buying stationary for Rs. 50 results in reducing money by Rs. 50 and increase in stationary value by Rs. 50.
Business transaction can either be a physical transaction such as sale, purchase, payment, income etc. or a non-physical transaction e.g. loss from flood, fire loss, depreciation, etc.
It is a written document which contains details of the business transaction. It is also referred to as supporting document and hence it is of prime importance for the Accountant. Source document can be anything e.g. receipt of purchases, invoices for sales, debit and credit notes etc. Such documents are called source documents. These documents becomes the source of information based on which business transaction can be recorded by an Accountant
Let us see few examples of source documents:
- Invoice Bill: It is prepared by the seller, for goods sold. When the goods are sold, seller prepares the invoice and gives original to the buyer and keeps the copy with himself. General format of bill or invoice is date, buyers’ name and contact details, item bought, quantity, price per unit and total amount to be paid by the buyer. This invoice or bill becomes the source document for both the parties for accounting purpose.
- Receipt: Receipt is an evidence of making the payment on account of any business transaction. This is the source document for the buyer, who have made payments towards the purchase of goods from the supplier. It shows the details of the item bought by the buyer like name of the item, it’s quantity, price per unit and the total amount paid or payable by him. So we can say that invoice for the seller becomes the receipt for the buyer.
- Debit Note: A debit note is a document which shows that the organization has raised debit against the party to whom this document is sent in respect of business transaction other than the credit sale. For E.g. If an organization XYZ purchases goods from a supplier A. Later it is found that few goods are defective and they are returned to the “A”. XYZ may make a debit note against the supplier A for an amount equal to the returned goods which is to be recovered from him. And supplier A will issue credit note.
- Credit Note:Similar to Debit Note, Credit note is a document which shows that the organization has to give credit to the party holding credit note in respect of the business transaction other than credit purchase. For E.g. If an organization XYZ sells goods to a client B. Later B finds that few goods are defective and they are returned to XYZ. Then XYZ has to issue credit note to client B for the amount equal to the goods returned by him. And B will make a debit note against XYZ for the same amount.
- Payment/Remittance Advices: Today’s world is the world of electronic payment. Sometimes amount due towards the seller is paid directly in the bank of supplier by the buyer. Supplier receives remittance advice from bank when money is deposited in the bank. Such advice can be used as an evidence to record the receipt of the amount from the client / buyer. Similarly, cheque can also be used as a source document.
- Vouchers:If supporting document is not there then voucher can be prepared to record the transaction. For E.g. If wages or salary is paid in cash, Accountant may write a voucher and employee signs it. It is a proof for recording the payment of wages in cash. Voucher has details like date, description of why payment is made, amount etc. Organization may design their own format of voucher which fulfills their need like payment voucher, receipt voucher or bank deposit voucher.
Thus, a business organisation records various business transactions supported by source documents.