What is a transaction in business?

One of the most important things you need to do as a business owner is recording all your business transactions. Any transaction, big or small, impacts your business and needs to be properly accounted for. But, first, you must understand what a business transaction is.

This guide will answer:

• What is a transaction in business?
• What are the different types of business transactions?
• What are some examples of business transactions?
• How do I record business transactions?
• How can Countingup help with business transactions?

A transaction is an agreement between a buyer and seller to exchange goods, services, or financial assets for money. Transactions between a buyer and seller are relatively straightforward, where one party pays the other party for a product or service. Once they agree on terms, they exchange the money for the item, completing the transaction.

Still, the term ‘business transaction’ can get tricky in small business bookkeeping. That’s because you can record a transaction before or after it happens, depending on what accounting method you use. 

For example, sometimes you might record a transaction before it actually happens, such as expenses you know about that aren’t due yet. This might happen if you sell a product or service and send an invoice that the customer or client uses to pay you later. 

Businesses can use either cash-based or accrual accounting to record their transactions. The accounting method you use will depend on your business type and how many financial transactions you complete every month. We’ll explain more about recording transactions later in this guide. 

Business transactions are usually classified in the following four ways:

Cash transactions happen when payments are made in cash at the same time the transaction occurs. For example, if a customer purchases a product from you and pays at the checkout, the cash transaction happens between you and the customer. This transaction would be called “cash” even if the customer pays by a debit or credit card since the payment still happens at the same time as the transaction.

A credit transaction occurs when the payment is made within a set amount of time after the transaction, also called the credit period. For example, if a customer hires your business to do some work on their house. Instead of paying you when you agree to do it, you send them an invoice after completing the work allowing them 30 days to pay you. 

If a business transaction occurs without an external party involved, it’s called an internal transaction. This could be transferring funds to a different account, using your profits to pay yourself in dividends, or loss of assets. Even though you haven’t exchanged anything with a third party, a significant event has occurred that affects your business accounting. 

External transactions, or exchange transactions, involve two or more separate parties. These transactions are generally daily transactions such as selling or purchasing goods or services, paying rent or utilities or paying suppliers. 

Your business participates in multiple business transactions every day, and every one of these transactions affects your business accounting. To give you a better understanding of what these transactions are, we’ve listed the main everyday transactions here:

• Borrowing money from a bank: Here, your company participates in a business transaction with the bank. This is an example of an external credit transaction.
• Buying goods from a vendor: This transaction is between your company and the vendor and is also an example of an external transaction. This activity can be either cash or credit, depending on when you pay your supplier.
• Paying rent and other utilities: Expenses like rent, electric, water, or internet bills are all examples of external credit business transactions. 
• Sale of goods: If you make a sale, your company enters a business transaction with the customer. The sale is a cash transaction if the customer pays right away and a credit transaction if you issue an invoice for them to pay later.
• Paying interest: Interest paid is another form of a business transaction, also external and credit. 

The only way you can stay on top of your business transactions is to keep records of them. We’ll explain how in the next section. 

When you set up an accounting system for your small business, you need to choose a method for recording your financial transactions. Typically, there are two methods you can use to record your income and expenses:

When using cash accounting, you record your transactions when money exchanges hands. In other words, you only record a business transaction once you’ve paid or received the money. 

This is the simplest and most straightforward method available and gives small businesses a clear picture of how much money they have on hand. Although, only businesses that make under £150,000 per year (annual turnover) can use this method. 

While cash accounting is easier to use, most businesses have to abandon it and start using accrual accounting eventually. That’s because accrual accounting allows you to record a transaction when it happens, whether money has exchanged hands or not. 

The accrual accounting method requires you to use a double-entry accounting system and record two entries for every transaction: one debit and one credit account. You can learn more about how accrual accounting works here.

As a small business owner, accounting software is the best way to record your business transactions. You can also choose to hire an accountant for extra help.

Recording all your business transactions can be very time-consuming when you’re self-employed. Countingup is the business current account and accounting software in one that makes recording business transactions easy.

Download the Countingup app to sign up for your business current account and receive your contactless Mastercard. Everytime a payment is made to your business account or you use your card to pay an expense, the Countingup app adds the transaction to its inbuilt accounting software instantly. 

The app also has a ton of well-designed features created to help you stay on top of your financial transactions, including a receipt capturing tool, automatic expense categorisation, and cash flow insights. 

Countingup is the revolutionary accounting app that all small businesses need.

Find out more here.