Definition and Characteristics of Financial Transactions

Definition

A financial transaction is defined as any economic event or activity that occurs within an entity or between it and external parties, directly affecting the company's financial position and measurable in specific monetary units. These transactions form the foundation of the accounting system, where they are recorded, classified, and summarized in financial statements to show the entity's financial performance and position.

Characteristics

• Measurability - Can be estimated in specific monetary units
• Financial Impact - Changes in assets, liabilities, or equity
• Documentation - Supported by financial documents and records
• Recordability - Can be entered into the accounting system
• Specific Date - Occurs at a determinable time
• Second Party - Involves at least two parties (internal or external)
• Objectivity - Verifiable and auditable
• Dual Effect - Affects at least two accounts (double-entry principle)

Types of Financial Transactions

Financial transactions vary based on their nature and impact on the entity, requiring classification to facilitate recording and accounting analysis.

Types:

• Administrative: Transactions generating income for the entity like sales and interest
• Capital: Transactions affecting fixed assets like equipment purchases
• Cash: Transactions involving immediate cash payment or collection
• Deferred: Transactions with postponed payment like credit sales
• Non-cash: Transactions not involving cash movement like depreciation
• Periodic: Regular and recurring transactions like monthly salaries
• Exceptional: Rare transactions like asset sales
• Internal: Transactions between departments within the same entity
• External: Transactions with external parties like customers and suppliers
• Current: Transactions affecting the current fiscal year
• Long-term: Transactions affecting multiple fiscal years

Evidence and Documentation of Financial Transactions

Financial transactions require supporting documents that prove their occurrence and provide necessary legal and accounting evidence for recording and auditing, such as:

• Invoices: Prove sales and purchases
• Vouchers: Receipt and payment vouchers for cash operations
• Checks: Evidence of payment and collection
• Contracts: Prove long-term agreements
• Bank Statements: Confirm banking transactions
• Purchase Orders: Prove purchase requests
• Delivery Receipts: Confirm goods receipt
• Shipping Documents: Prove goods transportation
• Official Correspondence: Confirm agreements
• Financial Reports: Summarize financial transactions
• Digital Documents: Approved electronic records

Impact of Financial Transactions on Financial Statements

Financial transactions directly affect all entity financial statements, leading to changes in assets, liabilities, and equity in the statement of financial position, and adding new revenues or expenses affecting net income in the income statement. They also show incoming and outgoing cash flows in the cash flow statement, and lead to adjustments in capital and retained earnings within the statement of changes in equity. All these effects maintain accounting balance according to the equation: Assets = Liabilities + Equity, resulting in changes to key financial indicators such as profitability, liquidity, and activity ratios.