The word ‘transaction’ is commonly used in business and finance circles. We hear sentences like “how many transactions you did today”, “how much are your monthly transactions”, “What is the value of this transaction” and “I have not done any transaction recently” etc.
If we try to put a formal definition of a transaction, it would be something like this:
“a transaction is a performance of a deal between two or more parties having a financial impact which can be measured reliably.”
An easy example would be: Company Dokia purchases one laptop from Walmart for $500 on cash.
Now, we need to dig down deep into this definition to understand it’s components:
First of all, it is a ‘performance of a deal’. So, it is not merely entering into a deal or doing an agreement or a contract. Instead, the transaction is an ‘actual performance’ of that agreement or arrangement. Just entering into a contract would not be considered as a transaction.
The second important point is that it has to be between two parties, at least. One person cannot do a transaction on its own. Let’s say that if sales department borrows a car from the HR department for three months, this cannot be recorded as a transaction in books of accounts of the company, because both departments are under the same organization.
Thirdly, there should be a financial impact. In the above-given example of purchase of laptop from Walmart, there is a financial impact on Company Dokia. However, if there is a deal performed between two entities without any economic impact, then this is not an accounting transaction. For example, Company Dokia makes a deal with Walmart to invite each other’s CEOs at their respective premises and show them around their offices. So, in this deal, there is no (apparent) financial impact. So, this deal of visiting CEOs will not be recorded and considered as an accounting transaction.
It is essential to understand the difference between an accounting transaction and an accounting event. Sometimes, an event may happen, which has a financial impact. So, this event shall also be recorded in the books of accounts of the organization. However, this cannot be termed as a financial transaction. For example, if an employee of company Dokia accidentally drops the laptop purchased from Walmart, this will be considered as an accounting event and will not be considered as an accounting transaction.