Running a successful business means paying attention to what's happening behind the scenes.
Whenever you make a sale, buy inventory, or pay employee wages, a business transaction is born. To make accurate business decisions and get a clear picture of your company's cash flow, you need to understand how these transactions work.
Ahead, you'll learn what business transactions are and how they're recorded in the company's books.
What is a business transaction?
A business transaction is an economic event between two or more parties that involves the exchange of goods, services, or money. To document and manage business transactions effectively, keep accurate records, use invoicing software, and ensure all agreements are clearly detailed to avoid disputes.
Key features of business transactions include:
The buyer and seller must agree on the terms of the exchange
The buyer makes an offer for the goods or services, and the seller accepts the offer. An example of this is when you buy a car. You make an offer of $10,000 to purchase a Honda Civic from a dealer, and the dealer accepts your offer. However, the order of the offer and acceptance can also be switched.
Think of shopping at the grocery store. The grocer offers to sell you a bag of rice for $1.99 and you agree to purchase it by checking out. These are both considered business transactions.
NOTE: Unlike the examples above, the exchange of goods or services doesn’t have to occur immediately.
Suppose your business entity is accepting preorders for a new product you’re launching in a few months. A customer agrees to purchase one and pays you now even though you won’t deliver the product until sometime later. This is a sales transaction.
The buyer must offer something of value to the seller
This is often cash. But it could also be goods or services, which is known as a barter transaction. A barter transaction example is when you provide a gift card from your ecommerce store to your tax accountant for preparing your annual tax return.
The key is that something of value must be offered by each party.
Let’s look in detail at a hypothetical ecommerce example. Suppose your ecommerce store sells Samsung cell phones. You make an offer to a wholesaler to purchase 100 Samsung Galaxy S24 phones for $300 each.
Does this qualify as a business transaction?
Not yet, because the wholesaler hasn’t accepted your offer. The wholesaler rejects your $300 per piece price and counters with $325. You agree this is still a reasonable offer and agree to purchase 100 phones at $325 each.
Now, we have a business transaction. The wholesaler made an offer, and you accepted. Both of you offered something of value—for the wholesaler it’s phones and for you it’s cash.
As we mentioned earlier, once a business transaction occurs, it must be recorded in the company’s financial records, depending on the type of business transaction.
Types of business transactions
Business transactions are recorded according to their type and category. There are four main types:
1. Sales transactions
All businesses exist to sell goods or services. A sales transaction happens when your business sells something to a buyer. That something could be a physical item, an intangible good (like software), or a service.
As we’ve seen, these exchanges can be for:
- Cash now (cash transactions)
- Cash later (credit transactions)
- Items or services of value (barter transactions)
Let’s get specific with an example. Assume a pastry company offers to sell a major hotel brand a case of its delicious macarons for $100 to give to guests. And the hotel accepts its offer.
This creates a sales transaction for the pastry company because it’s offering something of value (a case of macarons) and the hotel accepted by offering something of value (cash).
But what if the pastry company offers the case of macarons for a free one-night stay at the hotel? This is still a sales transaction because both parties agreed on the transaction details and both offered something of value.
2. Purchase transactions
In business, purchase transactions occur when a company buys goods or services. Like sales transactions, these purchases can be for cash or something of value.
Going back to the pastry company example, when the company buys sugar to make the macarons, a purchase transaction occurs and is recorded in the company’s financial books.
Purchase transactions also happen when the pastry company buys a MacBook to help with recordkeeping, a van to help with local deliveries or new baking equipment.
A business records a purchase transaction at the earlier of two events:
- Payment: when it pays for the goods or services it ordered
- Receipt: when it receives the goods or services
Let's consider some examples.
If the pastry company orders a MacBook for $1,500 but hasn’t paid for or received it, there’s no purchase transaction, and the bakery shouldn’t record this purchase.
But, if the company orders the MacBook and immediately pays with a credit card, then it has a purchase transaction to record. And, if the pastry company orders the MacBook and receives it, but hasn’t paid for it, it will record this as a purchase transaction.
If the pastry company offers a dozen macarons to a professional photographer for product photos for the company’s website, this is also a purchase transaction.
3. Payment transactions
Contrary to a purchase transaction, which may not include an immediate exchange of cash, a payment transaction is always accompanied by a cash transfer. When a company pays for any business-related item—whether salaries, utilities, office supplies, taxes, or inventory, a payment transaction occurs.
With a payment transaction, the key thing is that there must be a transfer of cash.
4. Receipt transactions
A receipt transaction occurs when a business receives money for any business-related reason. This could be for goods sold, services rendered, assets disposed of, or a tax refund—anything that leads to an increase in cash.
A receipt transaction differs from a sales transaction. But they are related. Remember that a sales transaction doesn’t always include an immediate transfer of cash. You have a sales transaction when you supply the requested goods or services, even if it’s not paid for immediately.
On the flip side, for a receipt transaction, a business must receive cash. So when you get paid by your customer for that sales transaction, you’ll have a receipt transaction to record.
How to record business transactions
All business transactions must be recorded in a company’s financial records.
This process is known as bookkeeping. Inaccurate bookkeeping can create a host of problems for a business owner, including solvency issues and inaccurate tax reporting.
The bookkeeping of a business is like a flow chart and follows these steps:
- Identify when a business transaction happens
- Quantify the financial impact of the transaction
- Record the transaction
- Prepare financial statements
Step 1: Identify when a business transaction happens
Understand your business to know when a business transaction occurs.
Perhaps an electronics ecommerce store receives 100 units of Samsung phones it ordered, a bakery receives money for the pastries it sold, or a business pays employees’ salaries.
Step 2: Quantify the financial impact of the transaction
Review relevant documents, like invoices, receipts, or contracts, to determine which financial accounts are affected and by how much.
Step 3: Record the transaction
Post the transaction, via a journal entry, into the financial ledgers. Include details such as the transaction date, items purchased, and the amount paid.
Step 4: Prepare financial statements
Financial statements are prepared periodically, often monthly, quarterly, and annually.
A business prepares its income statement, to know how much profit it earned or how much loss it incurred. Companies also prepare their balance sheets to know their assets, liabilities, and equity.
Manage business transactions easily with Shopify Balance
Thanks to technology, business transactions are easier to record, monitor, and analyze. And ecommerce businesses can use Shopify Balance to manage their business finances in one spot.
Integrated into your Shopify admin, Shopify Balance:
- Is fee-free
- Requires no minimum balance
- Gets you paid up to seven days earlier than a bank
- Automatically sets aside sales tax for you
- Syncs with your accounting software
- Has a mobile app to manage money on the go
- Gives you cash back on eligible purchases
- Provides you a complete view of your business’s money
Business transactions FAQ
What are the 4 types of transactions with examples?
Sales transactions: A sales transaction occurs when a business delivers a good or provides a service either for cash or for an item of value.
Purchase transactions: A purchase transaction occurs when a business buys a good or service for cash or an item of value.
Receipt transactions: Receipt transactions take place when a business receives money for any business-related reason, including for goods supplied, services rendered, or assets disposed of.
Payment transactions: Payment transactions occur when a business pays cash for any business-related reason, including buying goods, receiving services, or acquiring assets.
What are the elements of a business transaction?
An agreement to exchange goods or services between the buyer and seller for cash or item of value
The exchange of the goods or services
The exchange of cash or the agreed-upon item of value
