Financial transactions involve the exchange of money for assets and can be purely financial or a combination of financial and product transactions. There are three main types of transactions: product, distributive, and financial. Examples include buying gum, paying workers, and taking out a loan.
Any change in the finances of at least two companies or individuals can be a financial transaction. Financial transactions take place when someone chooses to present payment in exchange for an asset. In accounting, a transaction is considered a financial transaction only if it involves only money rather than a purchase in which money is exchanged for a good or service. Examples of this type of financial transaction include borrowing money and depositing money into a checking or savings account.
Any time money flows between companies or individuals, this flow is called a transaction. The flow of money between two accounts within an organization can also be called a transaction if treating it as such helps the company track its finances accurately.
There are three main types of transactions. Most people are more comfortable with product transactions, which track the purchase and sale of products. Purchasing a pack of gum is a commodity transaction between the gum chewer and the convenience store where the gum is purchased.
A distributive transaction keeps track of how money is distributed to workers, the production process, and the government. The paycheck that the gum company writes to workers at the gum factory is an example of a distributive transaction. Sales tax and income tax are also recorded as distributive transactions.
The financial transaction is a broader category than the first two. It is any gain on financial assets or liabilities. Financial transactions can be purely financial. Most often, financial transactions are a hybrid of a financial transaction and one of the other two types of transactions.
A loan is a perfect example of a purely financial transaction. The borrower requests a certain amount of money to make a big purpose, for example, a car. The lender pays a lump sum. Over months or years, the borrower repays the money with interest. The net worth of both the borrower and the lender changes several times throughout this transaction, but nothing changes hands except the currency.
Buying that pack of gum with a credit card is an example of a combination of financial and product transactions. The convenience store gives the gum gum. To pay for it, the gum-chewer takes out a small loan from the financial institution that issued his credit card. The gum chewer signs a receipt that tells the credit card company to pay the convenience store for the value of the gum. So the product transaction takes place between the gum chewer and the convenience store, but the financial transaction takes place between those two and a financial institution.
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