As businesses work with customers, vendors and employees, they conduct a variety of financial transactions. Some transactions involve the transfer of cash. Other transactions involve the promise of a future transfer of cash. These transactions form the basis for future financial reporting for the company. All transactions can be classified as internal or external transactions. Internal transactions use the resources of the business and involve no outside entities. Many of the transactions experienced by companies fall into the category of external transactions.
Accounting transactions impact the financial position of the company and need to appear in the financial records. The accounting department records each transaction in the financial records once it receives knowledge that the transaction occurred. The accountant receives a variety of documents to communicate information about each transaction. These documents include customer invoices, vendor billing statements or employee expense reports. The accountant uses information from the document to enter the dollar amount and the proper account for each transaction.
External transactions involve interaction between the company and an entity outside of the company. External entities conduct business with the company based on the benefits derived from that relationship. These entities might provide products or services to the company. Or they might receive products or services from the company. For example, the utility company who provides electricity, an office product supplier who ships pens, and a customer who purchases merchandise all qualify as external entities.
An external transaction refers to any transaction that occurs between the company and an external entity. Each transaction involves the transfer of resources. These resources include products, services or cash. The entities involved determine what resource they have to offer and what resource they’d like to receive. The company and the external entity exchange one resource for another in the transaction. Each company records the exchange in their financial records.
Businesses experience a variety of external transactions throughout their daily operation. These include selling products to customers, paying employees, borrowing money from a bank, or purchasing supplies from a vendor. Customers, employees, banks and vendors represent entities separate from the company. Transactions conducted with each of these entities represent external transactions. Each transaction provides benefits to both entities.