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A transaction is a contract between a buyer and a seller to exchange products, services, or financial assets for cash. The fundamental building blocks of economic activity are transactions, which take place constantly in the marketplace.
Depending on the type of exchange and the persons involved, transactions can be straightforward or complex. An easy transaction that involves two people (the buyer and the seller) and one asset is, for instance, purchasing a cup of coffee with cash (the money). Yet obtaining a mortgage to buy a home is a complicated process that involves a number of parties (the buyer, the seller, the bank, the appraiser, etc.) and numerous assets (the house, the money, the loan contract, etc.).
The way that transactions are documented and reported by firms can also be used to categorize them into distinct categories. In order to account for transactions, accrual accounting, and cash accounting are the two primary techniques. No matter when the money is received or paid, accrual accounting records a transaction as it happens. Only after the money is received or paid do you record a transaction in cash accounting.
Consider the scenario where you sell certain goods to a customer in January on credit and get payment in February. When you make the sale in January under accrual accounting, you would record revenue and accounts receivable (an asset). When you get payment in February, you will record revenue and cash (an asset) under cash accounting.
Financial statements including income statements, balance sheets, and cash flow statements depict transactions in a variety of ways, depending on the accounting technique used. Financial statements are records that sum up a company's position and financial performance over time. They are used to assess company actions by managers, investors, creditors, regulators, and other stakeholders.
Everyone who wants to learn more about finance has to understand transactions. Transactions demonstrate how value is produced, transferred, quantified, and reported in an economy. You can learn more about how markets work, how financial instruments work, how firms run, and how risks are managed by studying transactions.
