What Is A Business Transaction? Definition and Examples (2024)

Running a successful business means listening to what’s happening behind the scenes. 

Every time you make a sale, buy inventory, or pay worker wages, a business transaction is born. To make accurate business decisions and get a transparent picture of your organization’s money flow, you’ll want to understand how these transactions work. 

Ahead, you may learn what business transactions are and the way they’re recorded in the corporate’s books.

What’s a business transaction?

A business transaction is an agreement between a buyer and seller to exchange goods or services for money or other item(s) of value. These transactions affect the corporate’s financial position and are recorded in its accounting records, also called its books.

Key features of business transactions include:

The client and seller must agree on the terms of the exchange

The client makes a suggestion for the products or services, and the vendor accepts the offer. An example of that is whenever you buy a automobile. You make a suggestion of $10,000 to buy a Honda Civic from a dealer, and the dealer accepts your offer. Nevertheless, the order of the offer and acceptance will also be switched. 

Consider shopping on the food market. The grocery store offers to sell you a bag of rice for $1.99 and also you conform to purchase it by trying out. These are each considered business transactions.

NOTE: Unlike the examples above, the exchange of products or services doesn’t must occur immediately. 

Suppose your small business entity is accepting preorders for a brand new product you’re launching in a couple of months. A customer agrees to buy one and pays you now although you won’t deliver the product until sometime later. This can be a sales transaction.

The client must offer something of value to the vendor

This is usually money. But it surely is also goods or services, which is often called a barter transaction. A barter transaction example is whenever you provide a present card out of your ecommerce store to your tax accountant for preparing your annual tax return.

The secret’s that something of value should be offered by each party.

Let’s look intimately at a hypothetical ecommerce example. Suppose your ecommerce store sells Samsung cell phones. You make a suggestion to a wholesaler to buy 100 Samsung Galaxy S24 phones for $300 each.

Does this qualify as a business transaction?

Not yet, since the wholesaler hasn’t accepted your offer. The wholesaler rejects your $300 per piece price and counters with $325. You agree this continues to be an affordable offer and conform to purchase 100 phones at $325 each.

Now, we’ve got a business transaction. The wholesaler made a suggestion, and also you accepted. Each of you offered something of value—for the wholesaler it’s phones and for you it’s money.

As we mentioned earlier, once a business transaction occurs, it should be recorded in the corporate’s financial records, depending on the kind of business transaction. 

Kinds of business transactions

Business transactions are recorded in line with their type and category. There are 4 important types:

1. Sales transactions
2. Purchase transactions
3. Payment transactions
4. Receipt transactions

1. Sales transactions

All businesses exist to sell goods or services. A sales transaction happens when your small business sells something to a buyer. That something might be a physical item, an intangible good (like software), or a service.

As we’ve seen, these exchanges might be for:

• Money now (money transactions)
• Money later (credit transactions)
• Items or services of value (barter transactions)

Let’s get specific with an example. Assume a pastry company offers to sell a significant hotel brand a case of its delicious macarons for $100 to provide to guests. And the hotel accepts its offer. 

This creates a sales transaction for the pastry company since it’s offering something of value (a case of macarons) and the hotel accepted by offering something of value (money).

But what if the pastry company offers the case of macarons for a free one-night stay on the hotel? This continues to be a sales transaction because each parties agreed on the transaction details and each offered something of value.

2. Purchase transactions

In business, purchase transactions occur when an organization buys goods or services. Like sales transactions, these purchases might be for money or something of value. 

Going back to the pastry company example, when the corporate buys sugar to make the macarons, a purchase order transaction occurs and is recorded in the corporate’s financial books.

Purchase transactions also occur when the pastry company buys a MacBook to assist with recordkeeping, a van to assist with local deliveries or latest baking equipment. 

A business records a purchase order transaction at the sooner of two events:

• Payment: when it pays for the products or services it ordered
• Receipt: when it receives the products or services

Let’s consider some examples.

If the pastry company orders a MacBook for $1,500 but hasn’t paid for or received it, there’s no purchase transaction, and the bakery shouldn’t record this purchase.

But, if the corporate orders the MacBook and immediately pays with a bank card, then it has a purchase order transaction to record. And, if the pastry company orders the MacBook and receives it, but hasn’t paid for it, it’s going to record this as a purchase order transaction. 

If the pastry company offers a dozen macarons to knowledgeable photographer for product photos for the corporate’s website, this can be a purchase order transaction.

3. Payment transactions

Contrary to a purchase order transaction, which can not include an instantaneous exchange of money, a payment transaction is at all times accompanied by a money transfer. When an organization pays for any business-related item—whether salaries, utilities, office supplies, taxes, or inventory, a payment transaction occurs. 

With a payment transaction, the important thing thing is that there should be a transfer of money.

4. Receipt transactions

A receipt transaction occurs when a business receives money for any business-related reason. This might be for goods sold, services rendered, assets disposed of, or a tax refund—anything that results in a rise in money.

A receipt transaction differs from a sales transaction. But they’re related. Keep in mind that a sales transaction doesn’t at all times include an instantaneous transfer of money. You have got a sales transaction whenever you supply the requested goods or services, even when it’s not paid for immediately.

On the flip side, for a receipt transaction, a business must receive money. So whenever you receives a commission by your customer for that sales transaction, you’ll have a receipt transaction to record. 

Learn how to record business transactions

All business transactions should be recorded in an organization’s financial records.

This process is often called bookkeeping. Inaccurate bookkeeping can create a number of problems for a business owner, including solvency issues and inaccurate tax reporting.

The bookkeeping of a business is sort of a flow chart and follows these steps: 

1. Discover when a business transaction happens 
2. Quantify the financial impact of the transaction
3. Record the transaction 
4. Prepare financial statements

Step 1: Discover when a business transaction happens 

Understand your small business to know when a business transaction occurs.

Perhaps an electronics ecommerce store receives 100 units of Samsung phones it ordered, a bakery receives money for the pastries it sold, or a business pays employees’ salaries. 

Step 2: Quantify the financial impact of the transaction

Review relevant documents, like invoices, receipts, or contracts, to find out which financial accounts are affected and by how much.

Step 3: Record the transaction 

Post the transaction, via a journal entry, into the financial ledgers. Include details resembling the transaction date, items purchased, and the quantity paid. 

Step 4: Prepare financial statements 

Financial statements are prepared periodically, often monthly, quarterly, and annually.

A business prepares its income statement, to know the way much profit it earned or how much loss it incurred. Corporations also prepare their balance sheets to know their assets, liabilities, and equity. 

Manage business transactions easily with Shopify Balance

Due to technology, business transactions are easier to record, monitor, and analyze. And ecommerce businesses can use Shopify Balance to administer their business funds in a single spot.

Integrated into your Shopify admin, Shopify Balance: 

• Is fee-free
• Requires no minimum balance
• Gets you paid as much as seven days sooner than a bank
• Robotically sets aside sales tax for you
• Syncs along with your accounting software
• Has a mobile app to administer money on the go
• Gives you money back on eligible purchases
• Provides you a whole view of your small business’s money 

Due to technology, business transactions are easier to record, monitor, and analyze. And ecommerce businesses can use Shopify Balance to administer their business funds in a single spot. Integrated into your Shopify admin, Shopify Balance: Is fee-free Requires no minimum balance Gets you paid as much as seven days sooner than a bank Robotically sets aside sales tax for you Syncs along with your accounting software Has a mobile app to administer money on the go Gives you money back on eligible purchases Provides you a whole view of your small business’s money