Please describe an external business transaction (e.g. are selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank). What are the different types of accounts a company uses? Elaborate with examples.
An external budiness transaction is an exchange of values
between two entities that changes the accounting equation. In
other words, an external transaction occurs between two companies
or companies in which the account is exchanged. If a company
transfers products from one part to another within the company, it
will not be considered an external transaction. This is an internal
operation. External operations are performed between two separate
entities.
External transactions must change the accounting equation to exist.
Acts such as a company that enters into an agreement with a union
and extends the contract for another year do not change the
accounting equation. Therefore, it is not considered an external
transaction even if the contract is terminated between two
entities. However, if there is an exchange of money, the action
will change the equation.
For example,
(1) the company paid $ 100,000 to the union to reach an
agreement. This is the value change between the parties that
affects the equation.
Example
(2) The simplest example of an external operation is the purchase
of equipment. Suppose Corey's factory is growing and he needs
another CNC machine CNC center. LLC is a company on the road from
Corey that makes machines. Corey bought a new machine from Todd and
recorded the purchase by deducting his fixed assets account and
refilling the cash account. Todd does the opposite. He owes cash
receipts and credits his sales revenue.
As you can see, this business event took place between two
different companies. This is the first requirement. It also changed
the accounting equation for both companies. Corey’s cash is
declining and his fixed assets are growing; Where Todd's income and
earnings increase. This is the second requirement that is
considered external operations.
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