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Nature of Business Transaction

Accounting Process is primarily concerned with the business transactions. A business transaction is a business activity involving the exchange of money and goods or services for money or for a right to collect money between accounting entities – person (natural and artificial) and which can be objectively measured. The purchase and sale of goods for cash or on credit, the receipts and payments of cash etc., are termed as business transactions since these activities involve exchange of values between parties.

A business transaction therefore results in some property, goods or services changing hands. One party receives the benefit which the other party gives. In short the following three points are worth noting about business transactions:

(i)  There must be at least two parties to a transaction.
(ii) The transaction involves an exchange or transfer of money or money’s worth such as goods or services.
(iii) It means giving (or promise to give) some benefit by one party and at the same time receiving equal benefits by other party in terms of money or money’s worth.

Business transactions cause change in the assets, liabilities and owner’s capital of a business enterprise. Some more examples:

(i)    When cash is borrowed from a bank:

 This activity can be objectively (free from bias) measured in terms of money – assets as affected as cash increases and liabilities are also affected since a liability to the bank is created.

(ii)    When a machine is purchased for cash:

This business activity can be objectively measured in terms of money since assets are affected, that is, cash decreases and machine increases.

(iii)    When ‘A’ sells goods to ‘B’ and ‘B’ promises to pay in future:

a business transaction takes place which involves the transfer of money’s worth.

Business transactions may be classified into two broad groups: (i) External (or Exchange) transactions: An external transaction is one that takes place between the business enterprises and another party. (ii) Internal (or Non-exchange) transactions: An internal transactions is one that takes place within the business entity itself, such as expiration or transfer of costs within the enterprises.

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