Accounting involves summarizing, analyzing, categorizing, and reporting financial transactions. It is the backbone of any company and deals with finances and financial information. Most companies have a dedicated accounting department that overlooks and manages that information. Accounting is crucial in allowing companies to understand their finances. In summary, it quantifies qualitative information that can be helpful in decision-making.
Accounting primarily involves preparing financial statements. For most outsiders, these statements may look straightforward. However, it involves a comprehensive process that includes several steps. Most accounting systems take financial transactions as a source. Once they consider it, they process it to analyze how it enters the financial statements. The process begins with books of prime entry, which companies summarize into general ledgers.
Once companies prepare the general ledgers, they must summarize ledgers to prepare the trial balance. This document serves as the base for preparing the financial statements. The primary financial statements include the balance sheet, income statement, cash flow statement, and statement of changes in equity. Once companies prepare those reports, the accounting process restarts and continues, in the same way, every year.
While accounting may involve the above steps and processes, it may include various concepts and principles. On top of that, companies may use several accounting processes to record transactions. One of these consists of transactional accounting. Before understanding that, however, it is crucial to discuss what accounting transactions are. Once it becomes clear, defining transactional accounting becomes more straightforward.
What is an Accounting Transaction?
An accounting transaction is any business activity that can have a monetary impact. Usually, it impacts a company’s financial status and financial statements directly. For all entities, financial and accounting transactions are inevitable in daily operations. Accounting transactions affect the accounting systems and financial processes in a company. Since these transactions have a monetary effect, recording and presenting them is crucial.
Accounting transactions may differ from one company to another. On top of that, various entities may have several business and operational processes. Based on those, processing and classifying these transactions may differ. For most companies, these transactions occur with other parties, for example, customers and suppliers. Moreover, companies may also conduct accounting transactions internally, which they must record.
While transactions are activities occurring between any parties, accounting transactions are different. These transactions have a financial impact and a monetary amount. Usually, other activities may lack one or the other feature. For example, signing a contract with another entity may not have a financial impact. Therefore, it will not become a part of the accounting process. Nonetheless, it will classify as a transaction for companies.
However, accounting transactions differ as they will have a financial impact. Therefore, any activity arising from a contract with a monetary amount will constitute an accounting transaction. These transactions may occur in different forms and times. Companies must identify these promptly and process them for further reporting. Another crucial feature of an accounting transaction is that it becomes a part of financial statements.
Some examples of accounting transactions may include the following.
- Credit or cash sales to customers.
- Credit or cash purchases from suppliers.
- Receipt of cash from customers through invoices.
- Repaying suppliers through received invoices.
- Receiving funds from shareholders and other investors.
- Purchasing or acquiring fixed assets.
- Investing in other companies or obtaining intangible assets.
- Borrowing funds from a lender or creditor.
- Paying off borrowed funds to lenders.
- Producing inventory through raw materials and incurring conversion costs.
What is Transactional Accounting?
Transactional accounting does not refer to a specific branch or area in accounting. Instead, it is a concept that represents the idea behind the accounting process. Companies use transactional accounting to record financial events in conformity with acceptable practices. Usually, it involves using accounting principles and concepts to process accounting transactions. Transactional accounting is the backbone of any company.
Transactional accounting conforms with the accrual concept in accounting. This concept involves recording transactions as they occur. However, it does not relate to the monetary and cash events. Therefore, the accrual concept goes against the historical methods for accounting, which were primarily cash-based. Transactional accounting also involves recording and processing transactions when they occur.
Transaction accounting, also known as clerical accountancy, involves bookkeeping for accounting transactions. During this process, accountants must identify the accounting transactions occurring within an entity. Once they do so, they must account for it while conforming to the related accounting concepts and principles. This process is straightforward and the standard for all companies. It serves as an entry point into the accounting system.
Transactional accounting is a primary requirement for most accountants. These accountants are responsible for recording the financial events occurring in a company. However, the crucial part of this process is to conform to the acceptable practices in accounting. On top of that, recording those accounting transactions accurately is critical. Transactional accounting is also a crucial part of the educational requirements for accountants.
Overall, transactional accounting involves recording transactions as they occur according to accounting standards. This process is crucial in recognizing accounting transactions and reporting them. Transactional accounting sets the base for preparing financial statements. This process also involves tracking and recording every event occurring within a business. These events involve any activity that has a monetary impact.
How Does Transactional Accounting Work?
Transactional accounting involves tracking accounting transactions as they occur. Usually, companies have a dedicated department that overlooks this process. All transactions have a source document that sets the base for further processing. Companies use this document to enter details into the accounting systems. Usually, this document also includes a monetary amount, which forms the transaction.
Transactional accounting identifies all accounting transactions that occur within a company. Once it obtains information about those transactions, it must enter it into the accounting systems. However, this process is not as straightforward. Companies must ensure they follow accounting standards and practices when recognizing financial transactions. These practices may differ from one jurisdiction to another.
Generally, all companies incur accounting transactions regularly. The transactions also involve a monetary amount. Depending on the underlying activity, the results can be direct or indirect. These results impact the company’s finances and profits. Similarly, the funds spent on them can affect its resources and obligations. Identifying and recording these transactions is crucial to presenting an accurate picture.
Transactional accounting also involves keeping a detailed record of every transaction as it occurs. By doing so, companies can present a clearer picture to measure progress and performance. This process can further enhance the reporting and presentation of financial information. Transaction accounting can also help companies determine their financial power. Similarly, it allows them to establish which products and services are profitable.
What Are Some Examples of Transactional Accounting?
An example of transactional accounting may include sales made to customers. When a company sells a product or service, it generates income. Similarly, these transactions have a monetary amount, which impacts the company’s finances. Companies must record this transaction using the transactional accounting process. Usually, companies record the accounting transaction as follows.
Similarly, companies may also be a part of the purchase. Like sales, companies can acquire products or services. This transaction also has a monetary value and is the opposite of the sale transaction. Companies must record this transaction as it is crucial in presenting a fair view in the financial statements. Usually, companies use the following journal entries to record the accounting transaction as below.
Both of the above transactions constitute accounting transactions. The process to record them are an example of transactional accounting.
Transactional accounting is the process that involves recording, summarizing, and reporting financial information. This process starts with identifying and accounting for accounting transactions as they occur. Usually, companies have a dedicated department to overlook this activity. Examples of transactional accounting include recording all financial transactions that occur in companies.