The concept of transactions in economic activity

A transaction is a completed agreement between a buyer and a seller to

exchange goods, services, or financial assets. But in business bookkeeping, this
plain definition can get complicated. A transaction will be recorded earlier or
later depending on whether the company uses accrual accounting rather
than cash accounting.

 The accrual accounting method requires a transaction to be recorded when

it occurs, regardless of when the money is received or the expenses are
paid.

 The cash accounting method records a transaction only when the money is
received or the expenses are paid. This may require a letter of intent or a
memorandum of understanding.

Accrual accounting is used by businesses with gross receipts above $1 million a

year, while the cash accounting method is used by most small businesses.

Understanding the Transaction

A sales transaction between a buyer and a seller is relatively straightforward.

Person A pays person B in exchange for a product or service. When they agree
on the terms, the transaction is complete.

Transactions can be more complex in the accounting world since businesses

may make a deal today which won't be settled until a future date. Or, they may
have revenues or expenses that are known but not yet due. Third-party
transactions can also complicate the process.
Whether a business records income and expense transactions using the accrual
method of accounting or the cash method of accounting affects the company’s
financial and tax reporting.

Economic Transaction: transfer of goods, the rendering of services (including

saving and risk-taking), and transfers of money and other investments between
residents of one country and residents of another country.

Economic Transactions occurs when an economic value is provided by one

economic unit to another; the term "transaction" is usually used even when only
one aspect of a transaction is being considered. Accordingly, only three types of
transactions are distinguished here, i.e., transactions in goods and services,
transfer payments, and transactions in financial items.

Accounting transactions refer to any business activity that results in a direct

effect on the financial status and financial statements of the business. Such
transactions come in many forms, including:

 Sales in cash and credit to customers

 Receipt of cash from a customer by sending an invoice

 Purchase of fixed assets and movable assets

 Borrowing funds from a creditor

 Paying off borrowed funds from a creditor

 Payment of cash to a supplier from a sent invoice

It is imperative to remember that every transaction should show the balance

between the assets and the liabilities, or the debit and the credit, such that a
receipt of cash from a customer equals an increase in revenue or that a purchase
from a supplier equals an increase in expenses and a decrease in cash. 
Types of Accounting Transactions based on Institutional Relationship

The types of accounting transactions may be based on various points of view.

The first one that we will discuss is the types of accounting transactions
according to institutional relationships, namely external and internal
transactions.

1. External transactions

These involve the trading of goods and services with money. Therefore, it can
be said that any transaction that is entered into by two persons or
two organizations with one buying and the other one selling is considered an
external transaction. It is also called a business transaction.

Example: If Company A buys raw materials for its production from Company B,
then this is called an external transaction.

2. Internal transactions

They don’t involve any sales but rather other processes within the organization.
This may include computing the salary of the employees and estimating the
depreciation value of a certain asset.

Types of Accounting Transactions based on the Exchange of Cash

Based on the exchange of cash, there are three types of accounting transactions,
namely cash transactions, non-cash transactions, and credit transactions.

1. Cash transactions

They are the most common forms of transactions, which refer to those that are
dealt with cash. For example, if a company purchases office supplies and pays
for them with cash, a debit card, or a check, then that is a cash transaction.

2. Non-cash transactions
They are unrelated to transactions that specify if cash’s been paid or if it will be
paid in the future. For example, if Company A purchases a machine from
Company B and sees that it is defective, returning it will not entail any cash
spent, so it falls under non-cash transactions. In other words, transactions that
are not cash or credit are non-cash transactions.

3. Credit transactions

They are deferred cash transactions because payment is promised and completed
at a future date. Companies often extend credit terms for payment, such as 30
days, 60 days, or 90 days, depending on the product or service being sold or
industry norms.

Types of Accounting Transactions based on Objective

There are two types of accounting transactions based on objective, namely

business or non-business.

1. Business transactions

These are everyday transactions that keep the business running, such as sales
and purchases, rent for office space, advertisements, and other expenses.

2. Non-business transactions

These are transactions that don’t involve a sale or purchase but may involve
donations and social responsibility.

3. Personal transactions

Personal transactions are those that are performed for personal purposes such as
birthday expenditures.

Double-entry Bookkeeping of Accounting Transactions

When recording accounting transactions, the double-entry method is a system
bookkeeping where every entry to an account requires an opposite entry to a
different account producing balanced journal entries. The double-sided journal
entry comprises two equal and corresponding sides, known as a debit (left) and a
credit (right). It will ensure that total debits will always equal total credits.

General Contract Provisions

What Are General Provisions?

General provisions are balance sheet items representing funds set aside by a

company as assets to pay for anticipated future losses. For banks, a general
provision is considered to be supplementary capital under the first Basel Accord.
General provisions on the balance sheets of financial firms are considered to be
a higher risk asset because it is implicitly assumed that the underlying funds will
be in default in the future.

Provisions are created by recording an expense in the income statement and then

establishing a corresponding liability in the balance sheet. Account names for
general provisions either vary with the type of account or may be listed as a
consolidated figure in parentheses next to accounts receivable, the balance of
money due to a firm for goods or services delivered or used but not yet paid for
by customers.

A company that records transactions and works with customers through

accounts receivables may show a general provision on the balance sheet for bad
debts or for doubtful accounts. The amount is uncertain, since the default has not
yet occurred, but is estimated with reasonable accuracy.

In the past, a company might have analyzed write-offs from the prior accounting

year when establishing general provisions for doubtful accounts in the current
year. However, IAS 39 now prohibits creating general provisions based on past
experiences, due to the subjectivity involved in creating the estimates. Instead,
the reporting entity is required to carry out an impairment review to determine
the recoverability of the receivables and any associated provisions.

Companies providing pension plans may also set aside a portion of business
capital for meeting future obligations. If recorded on the balance sheet, general
provisions for estimated future liability amounts may be reported only as
footnotes on the balance sheet.

Laws on contracts

Definition:

Contract law is the body of law that relates to making and enforcing agreements.
A contract is an agreement that a party can turn to a court to enforce. Contract
law is the area of law that governs making contracts, carrying them out and
fashioning a fair remedy when there’s a breach.

Anyone who conducts business uses contract law. Both companies and
consumers use contracts when they buy and sell goods, when they license
products or activities, for employment agreements, for insurance agreements and
more. Contracts make these transactions happen smoothly and without any
misunderstandings. They allow parties to conduct their affairs confidently.
Contracts help make sure that the parties to a transaction are clear on its terms.

A valid contract has four parts:

Offer

First, one party must make an offer. They must state the terms that they want the
other party to agree to. If the other side agrees to the terms of the offer, the other
side may accept it, and the contract is complete.
Acceptance

Accepting another party’s offer makes a contract complete. The party that
accepts the offer must accept it on the same terms as the terms of the original
offer. They must make sure that the other side knows they accept it.

If they propose different terms, there’s no contract. Instead, their terms are a
counteroffer. It’s then up to the first party to accept the counteroffer or propose
another counteroffer.

Consideration

A valid contract requires each party to give something up. That’s called

consideration. For example, in the case of an employment contract, one party
agrees to give up money, and the other party agrees to give up labor. A contract
is a two-way street with each party giving up something to get something else
that they want.

Mutual intent to enter into an agreement

To have a valid contract, both parties must intend to be bound by the contract. If
a document says that it’s only a statement of intent, the parties may not have a
mutual agreement to enter into a contract. Informal agreements between friends
often fall into this category.

Typically a promise or an offer of a reward in exchange for certain behavior

creates an enforceable contract with the person who undertakes the activity. For
example, if someone offers a reward for information that leads to an arrest for a
crime, the person who provides the information can seek enforcement of the
reward. On the other hand, an advertisement is not a contract without an
additional, personalized invitation from the seller for the buyer to buy the good.
A contract can be implied. For example, a person who seeks medical treatment
has an implied contract with the doctor who treats them to pay a reasonable
charge for services. Likewise, a person who orders dinner at a restaurant has an
implied contract to pay for the meal that they order.

The validity of contracts

Lots of contracts are filled with mind-bending legal gibberish, but there's no
reason why this has to be true. For most contracts, legalese is not essential or
even helpful.

Most contracts only need to contain two elements to be legally valid:

 All parties must be in agreement (after an offer has been made by one
party and accepted by the other).

 Something of value must be exchanged -- such as cash, services, or goods

(or a promise to exchange such an item) -- for something else of value.

General business contracts

General business contracts cover topics like how your business is structured and

how various stakeholders are protected. Some of the most common types
include:

 Partnership agreement. A partnership agreement spells out the

relationship between partners, as well as their individual obligations and
contributions to a business.

 Indemnity agreement. An indemnity agreement is a contract in which

one person agrees to indemnify, or "hold harmless" another person for
damages resulting from a specific agreement. For example, a kennel
 owner might ask pet owners to sign an indemnity contract to prevent
lawsuits if a pet is hurt by another animal at the kennel.

 Nondisclosure agreement. Nondisclosure agreements give a business

owner legal status if a vendor, supplier, service provider, independent
contractor, or employee shares proprietary or confidential information
about your business.

 Property and equipment lease. These contracts spell out the terms and
conditions of a lease for a building or piece of equipment, including
monthly payment, deposits, terms, maintenance agreements, and other
related items.

Sales-related contracts

Sales contracts are legal agreements that cover how property, goods, and
services are purchased and sold, and lay out the legal framework for transferring
titles, if necessary. Some common sales contracts include:

 Bill of sale. A bill of sale is a hybrid legal document that transfers title of
a piece of property and serves as evidence that a legal agreement
(contract) was reached about the terms of the sale. For example, vehicles
are commonly transferred via bill of sale. 

 Purchase order. A purchase order is a legally binding agreement that

commits a business owner to purchase an item or quantity of items at an
agreed-upon price point, and specifies the delivery date and payment
terms.

 Security agreement. A security agreement pledges an asset or piece of

property as collateral to secure a loan. In the event of a default, the asset is
forfeited to the lender.
Employment contracts

Carefully documenting every aspect of employment relationships provides your

business with a level of legal protection. Some examples of commonly used
employment contracts include:

 General employment contract. An employment contract spells out the

relationship between you and your employee, including duration,
compensation, benefits, grounds for termination, and any other issues that
relate to your specific business such as ownership of work produced.

 Noncompete agreement. A noncompete agreement specifies a period of

time in which an employee is prohibited from competing with your
business once he or she leaves your company.

 Independent contractor agreement. The federal government has strict

criteria for determining whether a business relationship is
employer/employee or independent contractor. If you enter into a
relationship with a person to provide a particular service or complete an
individual project, you’ll likely need an independent contractor agreement
that lays out the terms and conditions for that project or service.

Many of the relationships and circumstances that business owners deal with are
covered by different types of business contracts. In some cases, these contracts
are self-explanatory and easily understood, but if you’re unsure about the types
of contracts you need for your particular business, you may want to consult an
attorney experienced in small business law.