Fact Checked

What is a Business Transaction?

Terry Masters
Terry Masters

A business transaction is an exchange of valuables that effects the financial position of a company, such as exchanging money for goods or services. It is the basic activity that defines the status of being in business. Bookkeeping is the process of making a record of all business transactions over time, placed in categories for tax purposes.

Every single instance of an exchange of goods or services for valuable consideration, such as money, is a separate business transaction that is important to record in its entirety. The record of transactions is comprised of documents supporting the exchange and the bookkeeping that places the exchange into categories that an accountant can later summarize for financial reporting. This process serves as the basis for many of the business’ legal obligations, particularly in regard to taxes.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Most jurisdictions that tax business sales or income require them by law to keep track of all business transactions. Although the way a business conducts its affairs and manages its bookkeeping is its own decision, tax authorities typically require a business to keep transaction records that are contemporaneous with sales. This means that it is unlikely to be sufficient to recreate a sales record at the end of the year if audited by authorities. The posthumous creation of business transaction records can be illegal when tied to an attempt to defraud the government.

National and local governments can assess taxes on sales and income that are wholly dependent on the business correctly reporting all income and substantiating the reporting with its business transaction record. Keeping track of transactions typically entails providing a record of purchase orders or invoices generated and received and any sales receipt issued. In a retail environment, a customer will likely place an order in person and receive a slip of paper as a receipt for the purchase. The store will also generate a copy of the receipt that is kept in its system.

Sales tax, in particular, is so important to governments that assess this type of tax that they pay special attention to companies that transact business mostly in cash. A business transaction can include payment by cash, check, or an electronic method, such as by credit or debit card or through a third party facilitator over the Internet. Cash payments are the only type of payment that does not leave an automatic paper trail. Consequently, cash-heavy businesses are popular vehicles for evading taxes and laundering money.

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