Various Types of Transactions - Part 1, Introduction

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 (Please refer to: Various Types of Transactions – Part 2, 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 (Please refer to: Various Types of Transactions – Part 3, Collection from Sales or Services Rendered)

· 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) (Please refer to: Various Types of Transactions – Pat 4a, Collection from Other Source of Revenue and Income (Interest Income))

o Dividend income

This is earned through investment of shares in another company. It is a return on investment made. (Please refer to: Various Types of Transactions – Pat 4b, Collection from Other Source of Revenue and Income (Dividend Income))

o Rental incomeThis is earned through the letting of its assets (property, machinery, equipment & etc). (Please refer to: Various Types of Transactions – Pat 4c, Collection from Other Source of Revenue and Income (Rental Income))

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. (Please refer to: Various Types of Transactions – Pat 4d, Collection from Other Source of Revenue and Income (Proceeds from Disposal of Assets))

o Compensation received for loss of assets

Compensation received from insurance companies for stolen or damaged assets. (Please refer to: Various Types of Transactions – Pat 4e, Collection from Other Source of Revenue and Income (Compensation Received for Loss of Assets))

· Disbursement/Release of principal sum of loans or borrowings from third parties (usually financial institutions)(Please refer to: Various Types of Transactions – Part 5, Disbursement or Release of Principal Sum of Loans or Borrowings from Third Parties)

· Refund of deposits placed earlier with third parties

oE.g. The refund of rental and utility deposits upon termination of rental of premises.(Please refer to: Various Types of Transactions - Part 6, Refund of Deposits Placed Earlier With Third Parties)

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

I have discussed how transactions are recorded in the respective books of original entry General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Trial Balance? and More on Books of Original Entry - Cash Book . 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
Petty cash/cash at bank	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
?	?		?
Petty cash/cash at bank		XXXX