What is a Financial Transaction?

Any change in the finances of at least two businesses 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 as opposed to 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 in a checking or savings account.

Any time money flows between businesses 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 to track its finances accurately.

There are three main types of transactions. Most people are most comfortable with products transactions, which track the buying and selling of products. Buying a pack of gum is a products transaction between the gum chewer and the convenience store from which the gum is purchased.

A distributive transaction keeps track of how money is distributed to workers, the production process, and the government. The paycheck the gum company writes to the 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 of assets or of financial liabilities. Financial transactions may be purely financial. More 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 large purpose, for example a car. The lender pays out a lump sum. Over months or years, the borrower returns the money with interest. The net value of both the borrower and the lender change several times throughout this transaction, but nothing changes hands except currency.

Buying that pack of gum with a credit card is an example of a combination financial and products transaction. The convenience store gives the gum chewer gum. To pay for it, the gum chewer takes out a small loan with the financial institution that issued his or her credit card. The gum chewer signs a receipt telling the credit card company to pay the convenience store 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.