The traditional business model involves selling products or services to customers to generate revenue. Although the majority of businesses employ this model, some engage in more complicated business models such as acting as intermediaries between suppliers and customers, transacting with other businesses, generating income from advertising and marketing, and many other unique business plans. Regardless of the revenue generation method employed by a business, all of these models lead to various business transactions.
Business transaction refers to any activity or event that affects the financial position and can be valued monetarily. Chron.com defines it further as “an event involving the interchange of goods, money, or services between two or more parties.”
These transactions can be one-time deals such as a retail purchase or continuous such as an extended service contract. They must be initiated by an authorized person and supported by a document. Every valid transaction is recorded into the books or journals of the business. Hence, it belongs to the company and not the owner or manager.
In general, business transactions can be categorized either as revenue or capital transactions. Revenue transactions include daily activities such as sales, purchase of goods, etc. Meanwhile, capital transactions refer to activities with long-term objectives such as purchasing fixed assets, lease agreements, etc.
The Five Most Common Types of Business Transactions
Sales transactions are initiated by the customer when availing goods or services, either in the shop or through the Internet. In some business models, a salesperson encourages customers to place an order. Once the product or service is delivered, the customer pays based on the agreed terms and the business issues a receipt. The transaction is then recorded into the cash register system.
Many businesses send customers an invoice that contains the amount payable and the payment terms. This reminds them of their dues. Enterprise billing solution help streamline this process for both the customers and businesses.
Purchase transaction involves the procurement of necessary goods and/or services. It is initiated by authorized personnel of the business and is documented using a purchase order or requisition, which is then communicated to the supplier. Once the orders are received, the supplier’s delivery note is approved.
The supplier issues invoices which are then recorded into the payables ledger. Once the business pays, the supplier issues a receipt. In some cases, goods will be returned to the supplier or the invoice not accepted due to problems with the delivery. In any case, a credit note can be sent back to the supplier.
Businesses also regularly avail of services. There are one-time services like repair or maintenance and marketing or advertising services. Most commonly, services are recurring items such as utilities (electricity, rent, telephone, water, etc.) Either way, the invoices are checked to ensure that services are rendered satisfactorily and priced reasonably compared to past dues.
These financial transactions are made from getting paid for goods or services rendered to another party. The document acknowledges that something of value has been transferred to another party. Receipts are most commonly issued to consumers by service providers and vendors; however, business-to-business transactions also use receipts.
Receipts are an essential part of a business’s financial record. In fact, the IRS requires every business to document and store their receipts. Some of the types of receipts include gross receipts, cash register tape receipts, invoices, petty cash slips, and credit card receipts and statements.
This refers to transactions wherein the business pays another business or supplier. As mentioned above, payments are done for either cash basis or charge purchases. Charge purchases refer to products or services that the business promised to pay later. Charge purchases can be in the form of supplies or non-current assets.
To initiate a transaction, an employee prepares a purchase request and then is issued to a supplier. The supplier then issues an invoice. Once the item or service is delivered, an employee ensures that it is satisfactory. The invoice is then recorded into payables ledger. Payments for charge items are made preferably before the due date to avoid late payment charges. Payment transactions are also done for loans, taxes, lease, and other payables.
Payroll is another recurrent business transaction that involves paying the services of employees. Before the end of the pay period, the accounting department calculates the amount owed for each employee. Salaries can be a fixed amount or may depend on the total hours worked. Time records are necessary to prove the hours rendered.
After the wage is computed, the business issues pay or wage slip indicating their pay for the period and all other deductions. Wages are either paid in cash to employees or directly credited to their accounts.
These are five of the most common business transactions you’ll encounter in the course of running your business.