What Is a Transaction? A transaction is a completed agreement between a buyer and a seller to exchange goods, services, or financial assets in return for money. The term is also commonly used in corporate accounting. In business bookkeeping, this plain definition can get tricky. A transaction may be recorded by a company earlier or later depending on whether it uses accrual accountingor cash accounting. KEY TAKEAWAYS ●A transaction involves a monetary exchange for a good or service. ●Transactions can be a little more tricky when it comes to corporate accounting. ●Accrual accounting recognizes a transaction immediately after it is finalized, regardless of when payment is received or made. ●Cash accounting is used mostly by smaller businesses and records a transaction only when money is received or paid out. ●Third-party transactions can often complicate the process. Understanding Transactions A sales transaction between a buyer and a seller is relatively straightforward. Person A pays person B in exchange for a product or service. When they agree on the terms, money is exchanged for the good or service and the transaction is complete. Transactions can be more complex in the accounting world because businesses may make a deal today which won't be settleduntil a future date. Or, they may have revenues or expenses that are known but not yet due. Third-party transactionscan also complicate the process. Whether a business records income and expense transactions using the accrual method of accounting or the cash method of accounting affects the company's financial and tax reporting. ●The accrual accounting method requires a transaction to be recorded when it occurs, regardless of when the money is received or the expenses are paid. ●The cash accounting method records a transaction only when the money is received or the expenses are paid. This may require a letter of
intentor a memorandum of understanding.
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