Business Transaction

We should know that accounting equation is only affected when business enters into a transaction. The term transaction is defined below:


Business transaction is an event or happening that changes financial position or earnings of a business. An event is said to be a transaction when:

  • Two are more than two parties are involved.
  • Transaction is measurable in terms of money.
  • Transaction involves exchange of goods or services.

Categories of Business Transaction:

Transaction is the basic element of accounting that gives rise to entries in accounting records. Transactions may be categorized as:

(1) Cash Transaction, Definition:

Cash transaction occur when cash is paid or received at the time of transaction.

(2) Credit Transaction, Definition, Example and their Effect on Accounting Equation:

In credit transaction payment or receipt of cash is defined to a future date.

Let’s take an example to understand the effects of transactions on the equilibrium of the accounting equation.

Transaction 1:

Mr. Rainbow starts off with a trading business by putting his $50,000 savings in the business bank account.


Transaction 2:

Mr. Rainbow got an opportunity to have a financing from ABC bank for purchase of office furniture costing $10,000.


Transaction 3:

Mr. Rainbow acquires a suitable business premises for $20,000 paying out of the business bank account.


 Transaction 4:

Mr. Rainbow brought his personal vehicle costing $4,000 within the business.


Transaction 5:

Some inventory of goods was purchased on credit from a supplier D. Ingram for $3,000.


Transaction 6:

Mr. Rainbow paid $1,000 to D. Ingram by cheque. This would reduce bank balance (asset) and capital investment of the owner.