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Financial transaction

From Wikipedia, the free encyclopedia

Financial transaction involvingmoneyand agriculturalgoodsat afarmers' market

Afinancial transactionis anagreement,orcommunication,between a buyer and seller to exchangegoods,services,orassetsfor payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals.[1]A financial transaction always involves one or more financial asset, most commonlymoneyor another valuable item such asgoldorsilver.[2]

There are many types of financial transactions. The most common type, purchases, occur when a good, service, or other commodity is sold to a consumer in exchange for money. Most purchases are made with cash payments, includingphysical currency,debit cards,orcheques.[3]The other main form of payment iscredit,which gives immediate access to funds in exchange for repayment at a later date.[4]

History[edit]

Main article:History of money
Silver coin of theMaurya Empire,from the 3rd century BC

There is no evidence to support the theory that ancient civilizations worked on systems ofbarter.Instead, most historians believe that ancient cultures worked on principles ofgift economyanddebt.[5]In a gift economy, valuables are given without any formal declaration of repayment, often thought to be a form ofreciprocal altruism.[6]Official systems of credit and debt were first created around 1800BCEby theBabylonians,who established the first formal interest rate limits with theCode of Hammurabi.[7]

Many cultures around the world began usingcommodity money—objects whose value comes from their intrinsic value.[8]These often included gold or silver coins, along with non-metal objects such ascowrie shells,beaver pelts,and dried corn.[9][10]Between 1000 BCE and the first millennium CE, coinage became increasingly common throughout Europe and Asia.[11]In England, banknotes were introduced starting in the 17th century. Each note promised to pay the bearer the value in gold upon demand—this is called agold standard.[12]In the 20th century, many countries gradually phased out the gold standard in favour offiat money—money that is not backed by any commodity.[13]

Since the start of the 21st century,online bankinghas become much more widespread. By 2001, tens of millions of people were doing their banking on theinternet.[14]By 2012, between 46 and 82 percent of all transactions were done electronically.[15]Digital currencies,currency that is stored on electronic systems, have gained popularity.Bitcoin,invented in 2009, reached a cap of overUS$1 trillion in 2021.[16]One of the downsides ofcryptocurrenciesis that since they are not tethered to any tangible assets, their price can fluctuate wildly, sometimes by 20% or more in a single day.[17]

Types of transactions[edit]

Purchases can be made through the use of physical currency, such as cash.

Cash transactions[edit]

A cash transaction is any transaction where money is exchanged for a good, service, or other commodity. Cash transactions can refer to items bought withphysical money,such ascoinsor cash, or with adebit card.These differ from credit transactions because the money is immediately taken from the buyer and given to the seller.[18][19]

Credit transactions[edit]

Main article:Credit

Transactions that use credit involve a deferred payment for the goods or services rendered. When something is bought using credit, it gives the seller an asset (the payment at a later date) and gives the buyer a liability (the amount that must be paid at a later date).[20]Credit cardsare an example of when credit is used, where the card issuer (usually a bank) gives the customer aline of creditwith which they can make purchases. The liabilities the customer accrues with the card are usually paid off at a set date, and any unpaid liabilities createinterestfor the issuer.[21]

Loansandmortgagesare examples of credit. The lender agrees to give out a lump sum (the "principal") to the borrower, who pays back the loaned amount over a set period of time (called a" term "). The lender usually charges an additional percentage on top of the initial amount borrowed, called the"interest rate".[22]Mortgages are similar to loans, but are usually for a larger amount of money and over a longer term, often for buyingreal estate.[23]Mortgages are almost always secured bycollateral,most commonly the real estate they are being used to purchase. If the borrower fails to make the necessary payments on the mortgage, the lender has the right to claim and sell the property in a process known asforeclosure.[24]

Internal and external transactions[edit]

External transactions are any business transactions that involve more than one party. For example, a company buyinginventoryfrom a supplier would be considered external. All cash and credit transactions are external, since they affect the finances of more than one person or group.[25]On the other hand, internal transactions only affect one business. Shifting goods between differentdepartmentsin a business is an internal transaction, since it does not change the overall finances of the company.[26]

See also[edit]

References[edit]

  1. ^"What Is a Transaction?".Investopedia.Archivedfrom the original on 25 January 2023.Retrieved8 February2022.
  2. ^"What is a Financial Transaction? (with picture)".Smart Capital Mind.Archivedfrom the original on 9 November 2022.Retrieved8 February2022.
  3. ^"Accounting Transactions".Corporate Finance Institute.Archivedfrom the original on 28 September 2022.Retrieved8 February2022.
  4. ^"What is credit? | CIBC".cibc.Archivedfrom the original on 9 November 2022.Retrieved8 February2022.
  5. ^Smith, Yves (26 August 2011)."What is Debt? – An Interview with Economic Anthropologist David Graeber".naked capitalism.Archivedfrom the original on 22 January 2023.Retrieved8 February2022.
  6. ^Cheal, David J (1988)."1".The Gift Economy.New York: Routledge. pp. 1–19.ISBN0-415-00641-4.Retrieved18 June2009.
  7. ^Desjardins, Jeff."INFOGRAPHIC: The 5,000-year history of consumer credit".Business Insider.Archivedfrom the original on 11 November 2022.Retrieved8 February2022.
  8. ^"What Is Money?".Investopedia.Archivedfrom the original on 30 January 2023.Retrieved8 February2022.
  9. ^Jan Hogendorn; Marion Johnson (1986).The Shell Money of the Slave Trade.Cambridge:Cambridge University Press.ISBN9780521541107.Retrieved29 April2015.
  10. ^"Commodity Money: Introduction".coins.nd.edu.Archivedfrom the original on 9 November 2022.Retrieved9 February2022.
  11. ^Kusimba, Chapurukha (20 June 2017)."When – and why – did people first start using money?".The Conversation.Archivedfrom the original on 16 February 2023.Retrieved9 February2022.
  12. ^"Banknotes: a short history".the Guardian.10 September 2013.Archivedfrom the original on 28 January 2023.Retrieved9 February2022.
  13. ^Dowd, Kevin (2001)."THE EMERGENCE OF FIAT MONEY: A RECONSIDERATION"(PDF).Archived(PDF)from the original on 17 August 2022.Retrieved8 February2022.
  14. ^"The History of E-Banking".Bizfluent.Archivedfrom the original on 9 November 2022.Retrieved9 February2022.
  15. ^Eveleth, Rose."The truth about the death of cash".bbc.Archivedfrom the original on 9 November 2022.Retrieved9 February2022.
  16. ^"Cryptocurrencies, Digital Dollars, and the Future of Money".Council on Foreign Relations.Archivedfrom the original on 9 November 2022.Retrieved9 February2022.
  17. ^Boukhalfa, Sofiane (16 November 2019)."What are the disadvantages of cryptocurrencies? - PreScouter - Custom Intelligence from a Global Network of Experts".PreScouter.Archivedfrom the original on 9 December 2022.Retrieved9 February2022.
  18. ^"Cash Transaction - Definition, What is Cash Transaction, and How Cash Transaction works?".cleartax.in.Archivedfrom the original on 9 November 2022.Retrieved15 February2022.
  19. ^"Cash Transaction".Investopedia.Archivedfrom the original on 9 November 2022.Retrieved16 February2022.
  20. ^"Difference between cash transaction and credit transaction".Termscompared.28 July 2019.Archivedfrom the original on 9 November 2022.Retrieved16 February2022.
  21. ^White, Alexandria (8 June 2020)."What is a credit card?".CNBC.Archivedfrom the original on 17 November 2022.Retrieved16 February2022.
  22. ^"Learn Exactly How Loans Work Before You Consider Borrowing Money".The Balance.Archivedfrom the original on 12 August 2022.Retrieved16 February2022.
  23. ^Thakur, Madhuri (14 February 2019)."Loan vs Mortgage | Top 7 Best Differences (With Infographics)".Archivedfrom the original on 9 November 2022.Retrieved15 February2022.
  24. ^"What is a difference between loan and mortgage?".scotiabank.Retrieved16 February2022.
  25. ^"Business Transaction - Types, Definition, Explanation and Examples".Accounting For Management.25 March 2017.Archivedfrom the original on 12 December 2022.Retrieved16 February2022.
  26. ^"Difference between internal transaction and external transaction".Termscompared.30 July 2019.Archivedfrom the original on 9 December 2022.Retrieved16 February2022.
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