BUSINESS TRANSACTIONS

• Introduction
  A business transaction is an interaction between a business and customer, supplier or any other party with whom they do business. It is an economic event that must be recorded in the business’s accounting system.
  There are many different types of business transaction including:
  ·           Cash sales of goods or services.
  ·           Credit sales of goods or services.
  ·           Receipt of cash from a customer to whom a sale on credit has been made.
  ·           Cash purchase of raw materials or goods.
  ·           Credit purchase of raw materials or goods.
  ·           Payment of cash to a supplier from whom a credit purchase has been made.
  ·           Receipt of loan proceeds.
  ·           Repayment of a loan.
  ·           Payments made to employees.
  ·           Payments made to the government (for example taxes).
  ·           Purchase of non-current assets.
  There are many mores examples.
  
  
  Classification of business transactions
  
  Business transactions can be classified in a number of ways including:
  ·           Simple transactions and complex transactions
  ·           One-off transactions and ongoing transactions
  ·           Capital transactions and revenue transactions
  
  
  Simple or complex
  Many transactions involve simple exchanges. For example, the sale of a Samsung Galaxy phone by a retailer to a customer for cash is a simple transaction. If the same sale is made on credit (where the customer does not pay immediately) the transaction is more complex. In this case it might involve a series of payments and some of the amount received might constitute interest.
  
  
  One-off transactions and ongoing transactions
  Many transactions might occur on a single occasion. However, there are some relationships which lead to a series of transactions of an ongoing nature. For example, a person buying a Samsung Galaxy would need a contract with a mobile phone network. This contract would involve a series of commitments by each party and result in a series of payments by the owner of the phone to the network provider in return for the provision of service of a specified level.
  One of the most important ongoing relationships is that between a person or a business and their banks. These may last for many years and involve the provision of a series of different services through a whole series of transactions
  
  
  • The difference between capital transactions and revenue transactions
  A business entity normally operates over many years, but prepares financial statements annually (at the end of each financial year).
  ·           It spends money for both the long term, by investing in machinery, equipment and other assets. It also spends money on day-to-day expenses, such as paying for supplies and services, and paying wages or salaries to employees.
  ·           It receives income from its business operations. It might also receive income from other sources, such as a new bank loan, or new capital invested by its owner.
  A distinction is made between ‘capital’ and ‘revenue’ items:
  ·           Items of a long-term nature, such as property, plant and equipment used to carry out the operating activities of the business, are ‘capital items’.
  ·           Items of a short-term nature, particularly items that are used or occur in the normal cycle of business operations, are ‘revenue items’.
  As a rough guide (but which is not strictly accurate):
  ·           capital items will be reported in the statement of financial position, because they are of a long-term nature
  ·           revenue items are at some stage reported as income or expenses in the statement of comprehensive income.
  
  
  Revenue income and capital receipts
  Revenue income is income arising from the normal operations of a business from its investments.
  Examples include:
  ·         Revenue from the sale of goods.
  ·         Commissions and fees received and receivable from the provision of a service.
  ·         Interest received and receivable from savings.
  ·         Rent received and receivable from letting out property.
  Revenue is reported in the statement of profit or loss in the statement of comprehensive income.
  Capital receipts are receipts of ‘long term’ income, such as money from a bank loan, or new money invested by the business owners (which is called ‘capital’).
  Capital receipts affect the financial position of an entity, but not its financial performance. Capital receipts are therefore excluded from the statement of comprehensive income.
  
  
  Illustration:
  A business entity borrows $100,000 from a bank for five years and pays interest of $8,000 on the loan for the first year.
  The loan is a non-current liability (and part of the long-term ‘capital’ of the business
  – a capital receipt) but the interest is an expense (revenue expenditure).
  A business has two identical vehicles each with engine problems.
  The engine of one is repaired – costs associated with the repair are revenue expenditure
  The engine of the second is replaced – this is capital expenditure.