It is a legal responsibility of businesses to keep records for all business transactions. This article explains this term in simple words.
Financial Accounting function mostly records data from within the organisation by recording business transactions. A transaction is an event which can be measured in monetary terms i.e. it has a financial value like $, £ or any other world currency. For example, a business buys goods to resell or when it pays its employees and bills etc. An event which cannot be denominated in monetary terms is not a transaction e.g. number of customers entering the shop or increase in customers’ satisfaction.
A transaction would result in in-flow or out-flow of cash in
• Present (cash transaction like when you buy groceries from the supermarket),
• Future (credit transaction e.g. when you have used the service like mobile phone and you will pay later) and in the
• Past, for example, you have already paid your fees to the university but the transaction (sale of services) will complete when you have completed your course, as at that point university would have fulfilled its obligation under the transaction.
This means a transaction is only completed when both parties (buyer and sellers) have completed their part of the contract. Completed and unfinished transactions are both presented differently in the financial statement and adjustments are required at the year end to accommodate the unfinished and/or unexpected outcomes of the transactions.
In information systems terms, a transaction is a piece of data and Financial accountants use five steps to process this data into information (financial statements) which are;
• Analysis of the transactions
• Recording the transactions
• Summarising the transactions and Trial Balance
• Year-end adjustments
• Presentation of the transactions – as Financial statements
*First three steps are known as Bookkeeping.
Most of the transactions can be understood and analysed by anyone who gives it a good thought, however, some transactions and year-end adjustments requires detailed knowledge of accounting rules like International accounting standards (IASs), International Financial Reporting Standards (IFRSs) and Generally Accepted Accounting Principles (GAAP). Only qualified accountants can perform a correct analysis of these transactions.
This article is written by Raja Mizan who is a senior lecturer in accounting & finance in a UK university. He is an ACCA and also runs his own accountancy practice.