Question

Please describe an external business transaction (e.g. are selling products to a customer, purchasing supplies from...

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.

Homework Answers

Answer #1

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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