What is a financial transaction? (with photo)

A car loan is an example of a purely financial transaction.

Any change in the finances of at least two companies or individuals can be a financial transaction. Financial transactions occur when someone chooses to present payment in exchange for an asset. In accounting, a transaction is considered a financial transaction only if it involves only cash, as opposed to a purchase in which cash is exchanged for a good or service. Examples of this type of financial transaction include borrowing money and depositing money into a checking or savings account.

Whenever money flows between companies or individuals, this flow is called a transaction. The flow of money between two accounts within an organization can also be called a transaction if treating it as such helps the company to accurately track its finances.

There are three main types of transactions. Most people are most comfortable with product transactions, which track the purchase and sale of products. Buying a pack of gum is a product transaction between the gum chewer and the convenience store where the gum is purchased.

A distributive transaction controls how money is distributed to workers, the production process, and the government. The paycheck that the gumball company writes to the workers at the gum factory is an example of a distributive transaction. Sales tax and income tax are also recorded as distributive transactions.

Financial transaction is a broader category than the first two. It is any gain from a financial asset or liability. Financial transactions can be purely financial. More often than not, financial transactions are a hybrid of a financial transaction and one of the other two types of transactions.

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A loan is a perfect example of a purely financial transaction. The borrower borrows a certain amount of money to make a big purpose, for example, a car. The creditor pays a lump sum. Over months or years, the borrower returns the money with interest. The net worth of the borrower and the lender changes several times over the course of the transaction, but nothing changes hands except the currency.

Buying that pack of gum with a credit card is an example of a combination of a financial transaction and a product. The convenience store gives out chewing gum. To pay, the gum takes out a small loan from the financial institution that issued its credit card. The gum chewer signs a receipt telling the credit card company to pay the convenience store the value of the gum. Therefore, the product transaction takes place between the gum and the convenience store, but the financial transaction takes place between the two and a financial institution.

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