Business Transaction

Business transaction is an event which affects a business financially i.e. it causes a change in its assets, liabilities and/or equity. Accounting is concerned with recording the business transactions of an entity and any event which does not affect the business financially is not recorded in accounting system.

Business transactions can be obvious and simple, for example, a usual purchase or sale. On the other hand, some business transactions are vague or complex, making it difficult to ascertain their financial impact, for example, a transaction involving acquisition of a subsidiary.

Also, some transactions are supported by source documents such as invoices but there may be business transactions that are implied and may not be directly supported by source documents. For example, impairment of an asset.

To ensure consistent and predictable treatment of different business transactions, the accounting profession has created sets of financial accounting standards which are documents that contain detailed rules and/or principles about how various types of business transactions should be accounted for.

Journal Entry

Business transactions are recorded in a special type of register called journal. Each business transaction is recorded using a group of debits and credits in the accounting journal and such a record is called a journal entry. Journal entries are passed according to accounting equation and they obey the debit credit rules.

A typical journal entry has the following information:

  • Date of transaction
  • Names of accounts involved in the transaction
  • Debit and credit columns for entering dollar amounts

The format of a typical journal entry is shown below:

Jan 1Cash4,400

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