A transaction is the transfer of money, either digitally or in cash, in exchange for a good or service.
It is the actual transfer of money that is called a transaction in accounting.
Common transactions
Both businesses and individuals are involved in some form of transaction almost every day. There are many different transactions in a business, and these three are the most common:
- Buy and sell: The most common transaction is buying and selling. The seller of a good or service (creditor) will have more money in their account when the transaction is completed, while the buyer of a good or service (debtor) will have less money in their account when the transaction is completed.
- Payment of wages: Payment of wages to employees is also a transaction. The labour of the employees is the product, and they receive wages from the employer in return.
- Production costs: Production costs, also known as variable costs, are costs you pay for production goods. This includes, for example, raw materials for making a product you sell, electricity, or similar.
How to book a transaction
When we post journal entries to general ledgers, we use double-entry bookkeeping. This means that we record the purchase or sale amount as a plus in one place in the accounts and as a minus in another place. This keeps the accounts balanced. Learn more about double-entry bookkeeping.