Various Types of Transactions – Introduction (Part 1)

It is easier to understand the basic principles and concepts of accounting once you are familiar with the types of transactions that a typical business entity has to deal with. There is no better place to start with knowing what kind of receipts a typical business receives and also the type of payments made. Even though numerous transactions nowadays are done on credit, eventually the amount owed is expected to be settled or paid.

Receipts

Generally, the receipt transactions of a typical business include the following:-

· Contribution of capital from owners

· Collection from sales or services rendered (cash sales or payments received from trade debtors). This is usually the major source of revenue or income of the business entity

· Collection from other source of revenue or income:-

o Interest income

This is earned through deposits placement with financial institutions. Sometimes, it is also earned through lending of money to third parties (Some countries have strict laws governing money lending activities) o Dividend income

This is earned through investment of shares in another company. It is a return on investment made.

o Rental income

This is earned through the letting of its assets (property, machinery, equipment & etc).

o Proceeds from disposal of assets

These are in respect of the money received as a result of the disposal of property, machinery, equipment & etc.

o Compensation received for loss of assets

Compensation received from insurance companies for stolen or damaged assets.

· Disbursement/Release of principal sum of loans or borrowings from third parties (usually financial institutions)

· Refund of deposits placed earlier with third parties

o E.g. The refund of rental and utility deposits upon termination of rental of premises.

Payments

Generally, they are for the following purposes: –

· For the inventories/stocks and related costs in which those inventories or stocks are meant for subsequent sale. (Generally all of these are called inventory costs)

· For capital expenditure.

· For revenue expenditure.

· For tax on the profits generated (due to income tax law requirements)

· For distribution of profits back to the owners in the form of dividends

· Sometimes as short term advance of money or loan to other entities ( it could be individuals including the owners, directors, employees or non-individuals such as companies who have business dealing with it)

· Of course on the other hand, it could be for repayment of loan or short term advance include interest for the money the business entities had borrowed earlier

· For refundable deposits of money paid to third parties or prepayment of capital and revenue expenditure

· Payment for investment in shares

· Deposit of money with financial institutions

· In less frequent instances, return of capital back to the owners

I will discuss the above one by one in my subsequent posts. However I am going to discuss briefly here on the double entries involved for the above transactions.

Receipts

For all receipt transactions above, if the transactions were in cash or cheques, the debit entry must be made to the petty cash or cash at bank account. The question here is – what should be the credit entry? Which account? Is it a credit to an income statement item account or to a balance sheet item account?

Balance Sheet

Income Statement

DR

CR

DR

CR

Cash at bank/Petty Cash

XXXX

?

?

?

Payments

On the other hand, if the transactions were in cash or cheques, the credit entry must be made to the petty cash or cash at bank account. The question is – what should be the debit entry? Which account? Is it a debit to an income statement item account or a debit to a balance sheet item account?

Balance Sheet

Income Statement

DR

CR

DR

CR

?

?

?

Cash at bank/Petty Cash

XXXX

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