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A transaction is a financial event involving the exchange of goods, services, or money between two or more parties. In accounting, a transaction typically includes a change in a company’s financial position, which gets recorded in a company’s accounting system. It provides insight into the company’s financial performance and helps ensure its financial records are accurate and complete.
Since tracking and recording transactions are crucial to a company’s long-term survival, companies must have a system to achieve it. Usually, this happens through transactional accounting.
What is Transactional Accounting?
Transactional accounting is the process of tracking various financial transactions occurring within a company. These transactions could include several items, such as sales of products or services, purchases of goods or services from other companies, payments made to suppliers or employees, and receipts from customers or clients. The essence of transactional accounting is to record these transactions according to accounting principles and standards.
Transactional accounting isn’t a new concept and has existed throughout the history of accounting. However, accounting software handles it automatically for companies nowadays. These systems typically use double-entry accounting, meaning every transaction gets recorded in two accounts. One side of the double entry includes the debit account, while the other is the credit.
How does Transactional Accounting work?
As transactions occur within the organization, companies must enter them into the accounting system. It happens manually or automatically, depending on the nature of the item and the accounting system under use. For example, a sale may automatically get recorded in the accounting system if the company uses a point-of-sale system. It is common when companies to use a point-of-sale system linked to their accounting systems.
Once transactions get recorded, the accounting system organizes them into various accounts. For example, they may include revenues, expenses, and assets. Essentially, these accounts help track the financial activity of the company. They also provide a base for creating financial statements and reports. These reports enable managing the financial performance of the company.
What is the role of Transactional Accounting in financial reporting?
The role of transactional accounting in financial reporting is to provide accurate and timely records of financial transactions. Consequently, these records are necessary for creating financial statements. Financial reporting involves preparing and presenting these statements to external users, such as investors, creditors, and regulatory bodies. These financial statements provide insight into the financial health, performance, and position of the company.
Transactional accounting plays a critical role in financial reporting because it provides the foundation to create accurate financial statements. Transactional accounting ensures that the financial data presented in the financial statements are complete, reliable, and consistent. Similarly, it helps to ensure that the financial statements comply with relevant accounting standards and regulations.
What is an example of Transactional Accounting?
When a company sells an item through one of its stores, it gets recorded in the point-of-sale system. From there, it reaches the accounting system. Since this system relies on the double-entry concept, it records the transaction into two sides. It occurs through a journal entry as follows.
| Dr | Cash |
| Cr | Sales |
The accounting system also updates inventory records to reflect the sale of items. It also occurs through a journal entry as follows.
| Dr | Cost of sales |
| Cr | Inventory |
These entries then reach the financial systems after going through several processes. The impact of these transactions advances to the financial statements.
Conclusion
Transactional accounting is a process that facilitates the recording and tracking of financial transactions. It forms the base of a company’s financial and accounting systems. Primarily, transactional accounting relies on the double-entry concept of accounting. Each transaction gets recorded into a debit and credit journal entry. Consequently, it reaches the financial statements after several processes.
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