Business Transactions – SS1 Book Keeping Lesson Note (First Term)

A business transaction is the transfer of goods, services, money or money’s worth (for example assets) to or from a business organisation.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define a business transaction;
2. name the two types of financial transaction;
3. explain a cash transaction and list the ways payment can be made;
4. explain a credit transaction;
5. identify given transactions as cash or credit transactions.

What is a business transaction?

A business transaction is an exchange of goods, services, money or money’s worth between a business and another person or organisation.

• Goods: items bought or sold, such as bags of rice, shoes or fabric.
• Services: work done for payment, such as transport, repairs or a hairdresser’s work.
• Money: cash or bank funds paid out or received by the business.
• Money’s worth: things that carry value, such as a motor vehicle, furniture or a building (assets).

Only transactions that can be measured in money are recorded in the books of the business.

What are the types of business transactions?

There are two types of financial transaction: cash transactions and credit transactions.

These are the transactions that are recorded, summarised, classified and analysed in accounting.

What is a cash transaction?

A cash transaction occurs when goods or services are received and payment is made immediately.

• Time of payment: at the moment the goods or services are received.
• Debt: none is created, because nothing is left unpaid.
• Example: a trader buys goods for ₦1,200 and pays on the spot.

Ways of making payment in a cash transaction

• Cash: notes and coins handed over directly.
• Cheque: a written order to a bank to pay a stated sum from the drawer’s account.
• Bank draft: a payment order issued by a bank, which the bank guarantees.
• Postal order: a money order bought from the post office and sent to the person being paid.
• Electronic payment: bank transfer or POS payment, now common in Nigerian shops.

What is a credit transaction?

A credit transaction occurs when goods or services are received and payment is postponed to a future time.

• Time of payment: later, on an agreed date or after an agreed period.
• Debt: created, because one party owes the other.
• Example: a shop buys goods worth ₦30,000 from a supplier and agrees to pay next month.

Key terms in credit transactions

• Debtor: a person who owes the business money, such as a customer who bought on credit.
• Creditor: a person the business owes money, such as a supplier who sold goods on credit.
• Credit purchase: goods bought now and paid for later.
• Credit sale: goods sold now and paid for later.

What is the difference between cash and credit transactions?

A cash transaction is paid for at once, while a credit transaction is paid for later.

How do you identify a transaction as cash or credit?

Check whether payment was made at the time of the transaction or left for later.

1. Read the transaction carefully.
2. Look for the words “cash”, “cheque”, “paid” or “received payment”. These show a cash transaction.
3. Look for the words “on credit” or “on account”. These show a credit transaction.
4. If no payment is mentioned for goods bought or sold, payment is still owing, so treat it as credit.
5. Write the answer and give a reason.

Worked examples

Evaluation

1. What is a business transaction?
2. State the two types of financial transaction.
3. Explain a cash transaction.
4. List four ways of making payment in a cash transaction.
5. Explain a credit transaction.

Assignment

Identify whether the transactions below are cash transactions or credit transactions.

• Jan 2: Started business with ₦10,000 cash
• Jan 3: Paid ₦7,000 of the business money into the bank
• Jan 7: Paid rent of shop by cash ₦600
• Jan 12: Bought goods for cash ₦1,200
• Jan 14: Bought goods on credit from Ayodele ₦30,000
• Jan 15: Sold goods and received cheque in payment ₦14,000
• Jan 20: Bought motor vehicle paying by cheque ₦9,000
• Jan 25: Paid salary of shop assistants by cheque ₦1,000
• Jan 28: Sold goods to Akinyemi ₦7,000
• Jan 31: Bought furniture for cash ₦3,000