Classification of Transactions:
There are different types of transactions in accounting, which are divided based on the type, purpose and financial effect of the transaction. This classification is important for accurately understanding and recording transaction functions. What is transaction? See here. Mainly, transactions can be divided into three main categories:
1. Cash Transactions
2. Credit Transactions
3. Foreign Transactions
1. Cash Transactions
A cash transaction refers to a transaction where cash is exchanged along with the delivery of goods or services. Here payment is made immediately at the time of sale of goods or services.
Example:
Let’s say the company sold goods for $5,000 in cash. This transaction is an example of a cash transaction.
Journal Entries
Date: 10 February 20XX
Cash A/C: Debit $5,000
Sales A/C: Credit $5,000
(Goods were sold for cash)
Here, Cash is increasing, so it is debited, and Sales is increasing, so it is credited.
2. Credit Transactions
A credit transaction is a transaction in which cash is not paid or received during the purchase or sale of goods or services. The money is subsequently repaid over a period of time.
Example:
Let’s say the company has sold goods worth $10,000 on credit, i.e. the buyer has not paid now, but will pay in the future.
Journal Entries:
Date: 10 March 20XX
Accounts Receivable A/C: Debit $10,000
Sales A/C: Credit: $10,000
Here, an asset is created as Accounts Receivable, so it is debited, and Sales is increasing, so it is credited.
3. Foreign Transactions
Transactions that take place in foreign currency are called foreign transactions. This type of transaction is usually seen in international business, where the currency may be different as the country is different.
Example:
Let’s say a company purchases goods worth €5,000 from the Germany, which is equivalent to $5,500.
Journal Entries:
Date: 10 March 20XX
Inventory A/C Debit $5,500
Accounts Payable A/C Credit $5,500
Here, Inventory is increasing, so it is debited, and Accounts Payable is creating a liability, so it is credited.
Note: This is a very simple example of foreign transaction. However, foreign trade and transactions are more complicated, and many transactions take place at the same time. If you want to see about foreign trade, visit this Wikipedia page.
Some other types of transactions:
Capital Transactions:
Such transactions relate to the purchase or sale of fixed assets. For example, purchase of land, buildings or machinery. Capital transactions have long-term financial implications and are treated as capital expenditure.
Example:
A company purchased land for an office building for $1,000,000.
Journal Entry:
Date: 12 February 20XX
Land A/C: Debit $1,000,000
Cash A/C: Credit $1,000,000
(Land purchased)
Revenue Transactions:
Revenue transactions are transactions related to short-term or day-to-day expenses, such as payment of salaries, electricity bills, etc. These generally fall under operating expenses and are considered part of the day-to-day operations of the business.
Example:
Let’s say the company paid $50,000 as salary to employees.
Journal Entries:
Date: 02 February 20XX
Salaries A/C: Debit $50,000
Cash A/C: Credit $50,000
(Salary paid)
More Transactions type
1. Asset Transactions:
Increase in Assets: A debit occurs when an asset account is increased. Examples include:
Cash: Receipt of cash from any source (e.g., sales, loans, owner investment).
Accounts Receivable: Sales or other amounts owed to the company.
Inventory: Purchase or production of goods to be sold.
Equipment/Furniture/Fixtures: Purchase of long-lived assets used in operations.
Decrease in Assets: A credit occurs when an asset account is decreased. Examples include:
Cash: Payment of expenses, repayment of loans, or dividends.
Accounts Receivable: Collection of amounts owed to the company.
Inventory: Sale or disposition of inventory.
Equipment/Furniture/Fixtures: Sale, scrap, or depreciation of long-lived assets.
2. Liability Transactions:
Increase in Liabilities: A credit occurs when a liability account is increased. Examples include:
Accounts Payable: Purchase of goods or services on credit.
Notes Payable: Borrowing funds from a lender.
Salaries/Wages Payable: Accrued but unpaid employee compensation.
Taxes Payable: Amounts owed to the government.
Decrease in Liabilities: A debit occurs when a liability account is decreased. Examples include:
Accounts Payable: Payment to suppliers.
Notes Payable: Repayment of borrowed funds.
Salaries/Wages Payable: Payment of accrued employee compensation.
Taxes Payable: Payment of taxes owed.
3. Equity Transactions:
Increase in Equity: A credit occurs when an equity account is increased. Examples include:
Common/Preferred Stock: Issuance of new shares.
Retained Earnings: Net income earned.
Decrease in Equity: A debit occurs when an equity account is decreased. Examples include:
Dividends: Distribution of earnings to shareholders.
Retained Earnings: Net loss or dividends declared.
4. Revenue Transactions:
Increase in Revenue: A credit occurs when a revenue account is increased. Examples include:
Sales: Revenue from sale of goods or services.
Interest/Dividend Income: Earnings from investments.
No Direct Debit: Revenue accounts are not directly debited. Instead, a decrease in revenue would be reflected as an increase in an expense account.
5. Expense Transactions:
Increase in Expenses: A debit occurs when an expense account is increased. Examples include:
Cost of Goods Sold: Direct cost of producing or purchasing goods sold.
Salaries Expense: Compensation paid to employees.
Rent/Utilities Expense: Operating costs.
Depreciation Expense: Allocation of asset cost over its useful life.
No Direct Credit: Expense accounts are not directly credited. Instead, a decrease in an expense would be reflected as a decrease in an asset or increase in revenue.
6. Dividends:
Declaration and Payment: Declaration of dividends decreases retained earnings (debit), while payment of dividends decreases cash (debit).
7. Closing Entries:
Temporary Accounts: At the end of the period, revenue, expense, and dividend accounts are closed to retained earnings.
Retained Earnings: The net income (revenue – expenses) increases retained earnings, while dividends decrease retained earnings.
More Resources
Thank you for visiting our site expartinaccounting.com and reading our resources on the Classification of Transactions: Best Practices for Reporting. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: