In this post, you will learn all the necessary key points and concepts about business transaction and documentation that a business uses.

A business transaction must have the following characteristics:

  1. Must have financial value
  2. At least two parties should be involved as transaction means exchanging of things or values
  3. The transaction has a document that proves exchanging has been done between the parties.

Definition Of Business

There are many definitions of business just like it is the process of making a profit. We have different meanings and definitions for business some of them are the following.

  • An organization that provides employment.
  • An organization that provides services and goods for making a profit.
  • An organization that uses economics and natural resources to produce goods and services.
  • An organization that has the vision of making a profit.

Profit: if a business makes more money than it spent, it is said to be profit whereas if the business spent more and earns little then this is a loss.

Some Important Business Categories

  • Business: An organization that exists or has the intention to make a profit and does not include such as local authority and charity.
  • Company: A legal form usually has limited liability, the company may run as a charity company.
  • Entity: An organization that has a specified goal or works with every individual for a single or common goal.
  • Firm: a business that is not constituted as business such as a partnership

Note: Business is always separate from its entity or owner.

Dual Effect Of Financial Transaction On a Business

Simply it is mean that every transaction has a dual effect means every debit transaction has a credit entry. (if you buy a car on cash then your transaction entry will be a debit the car (fixed or non-current asset) credit cash(current asset).

Internal And External Documentation In The Business

Internal document means confidential documents within a business and external documents can use outside the organization.

Examples of internal documents (staff timesheet, credit note, cheque, expense claim, supplier and inventory list, etc).

Examples of external documents such as quotations, letters of inquiry, sales orders, acknowledgment notes, delivery notes, etc.

Invoice: an invoice is a means of demanding payment. When a business sells something it will send a piece of paper demanding payment and when buying something it will get a piece of paper mentioning payment and tax payable due on time.

Usually, invoice shows

  • Supplier name & address
  • purchaser’s name ad address
  • invoice number
  • transaction date
  • quantity
  • description
  • The amount for that purchase
  1. On import and export invoices FOB is usually found, FOB stands for “free on board”.
  2. EX work means the delivery cost is not included in an invoice.
  3. Advice and delivery note is usually sent when delivering good, advice show customer to advise if you recommend anything change in good.
  4. A delivery note is used to confirm that the good has been delivered.
  5. Credit note: sent by a supplier for sales return.
  6. Debit note: sent by the customer for issuing a credit note.
  7. E-Commerce: E stand for electronic commerce and commerce means exchanging of goods. Business on the internet is now possible you can do business around the world through e-commerce.

What Does Discount Mean In a Business

A reduction in the price of a good is known as a discount. There are two types of discounts.

  1. Cash discount: reduction in cash or amount payable when you pay for goods.
  2. Trade discount: reduction on goods you purchase usually when you purchase in bulk quantity.

Discount practical example

Good purchase with the list price of 1800, calculate 10% discount?

Discount=list price *discount/100 (1800*10/100)=180

Sales tax: obligation which will have to pay to the government whenever making any sale, there are two types of sales tax.

  1. Input sales tax: pay when purchasing
  2. Output sales tax: pay whenever makes any sale.

Example of sales tax

Y sells a good worth 1000 net, calculate sales tax if it is 10%?

sales tax=net price*sales tax/100 (1000*10/100)=100.