A transaction is the transfer of money, either digitally or in cash, in exchange for goods and services.
Both businesses and individuals are involved in some form of transaction almost every day. Examples include buying groceries, paying for a taxi, doing payroll for your employees.
Common transactions
When you run a business, you have many different transactions. Most of them can be put into these three categories:
- Buying and selling goods and services: This is the most common type of transaction. Whether you’re selling goods and services to a client, or purchasing something from a supplier, you’re performing a transaction. Examples include selling your goods in an online store, paying for cleaning services at your office, or buying a company car.
- Paying wages: When you pay employees this is also considered a transaction. The employees’ labour is a service you purchase, and in return they receive a salary.
- Production costs: Production costs, also known as variable costs, are costs you pay for producing goods and delivering services. This includes, for example, raw materials for making a product you sell, electricity to operate machinery, or shipping costs you incur to send packages.
Bookkeeping a transaction
Bookkeeping, or accounting, is the process of keeping track of what your business buys, sells, owes, and owns.
Your accounts should show everything that happens in your business, so you have to bookkeep all your transactions.
Transactions are recorded differently depending on whether you’re buying or selling, and how you or your client pays. But one of the most important things to remember is that all transactions have to be verified with sales documents. Examples of sales documents are receipts and invoices.
You should make sure to record all your purchases, because you can get tax deductions for all your expenses. This means that you can deduct all business expenses from your income before you pay taxes—as long as you have sales documents to verify them.
If you want help with accounting, you should speak to an accountant.