A financial transaction is an agreement, or

communication Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...

, between a buyer and seller to exchange

goods In economics, goods are items that satisfy human wants and provide utility, for example, to a consumer making a purchase of a satisfying product. A common distinction is made between goods which are transferable, and services, which are not t ...

, services, or

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A financial transaction always involves one or more financial asset, most commonly

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

or another valuable item such as

gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile m ...

silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical c ...

. 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, including physical currency, debit cards, or

cheques A cheque, or check (American English; see spelling differences) is a document that orders a bank (or credit union) to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The pers ...

. The other main form of payment is credit, which gives immediate access to funds in exchange for repayment at a later date.

History

There is no evidence to support the theory that ancient civilizations worked on systems of barter. Instead, most historians believe that ancient cultures worked on principles of

gift economy A gift economy or gift culture is a system of exchange where valuables are not sold, but rather given without an explicit agreement for immediate or future rewards. Social norms and customs govern giving a gift in a gift culture; although there ...

and debt. In a gift economy, valuables are given without any formal declaration of repayment, often thought to be a form of

reciprocal altruism In evolutionary biology, reciprocal altruism is a behaviour whereby an organism acts in a manner that temporarily reduces its fitness while increasing another organism's fitness, with the expectation that the other organism will act in a similar m ...

. Official systems of credit and debt were first created around 1800

BCE Common Era (CE) and Before the Common Era (BCE) are year notations for the Gregorian calendar (and its predecessor, the Julian calendar), the world's most widely used calendar era. Common Era and Before the Common Era are alternatives to the ...

by the Babylonians, who established the first formal interest rate limits with the

Code of Hammurabi The Code of Hammurabi is a Babylonian legal text composed 1755–1750 BC. It is the longest, best-organised, and best-preserved legal text from the ancient Near East. It is written in the Old Babylonian dialect of Akkadian, purportedly by Hamm ...

. Many cultures around the world began using commodity moneyobjects whose value comes from their intrinsic value. These often included gold or silver coins, along with non-metal objects such as cowrie shells, beaver pelts, and dried corn. Between 1000 BCE and the first millennium CE, coinage became increasingly common throughout Europe and Asia. In England, banknotes were introduced starting in the 17th century. Each note promised to pay the bearer the value in gold upon demandthis is called a

gold standard A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the l ...

. In the 20th century, many countries gradually phased out the gold standard in favour of

fiat money Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...

money that is not backed by any commodity. Since the start of the 21st century,

online banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial inst ...

has become much more widespread. By 2001, tens of millions of people were doing their banking on the

internet The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices. It is a '' network of networks'' that consists of private, p ...

. By 2012, between 46 and 82 percent of all transactions were done electronically. Digital currencies, currency that is stored on electronic systems, have gained popularity. Bitcoin, invented in 2009, reached a cap of over US$1 trillion in 2021. One of the downsides of cryptocurrencies is that since they are not tethered to any tangible assets, their price can fluctuate wildly, sometimes by 20% or more in a single day.

Types of transactions

Cash transactions

A cash transaction is any transaction where money is exchanged for a good, service, or other commodity. Cash transactions can refer to items bought with physical money, such as coins or cash, or with a debit card. These differ from credit transactions because the money is immediately taken from the buyer and given to the seller.

Credit transactions

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).

Credit cards A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...

are an example of when credit is used, where the card issuer (usually a bank) gives the customer a line of credit with 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 create

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is disti ...

for the issuer. Loans and mortgages are 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". Mortgages are similar to loans, but are usually for a larger amount of money and over a longer term, often for buying real estate. Mortgages are almost always secured by collateral, 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 as

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mor ...

Internal and external transactions

External transactions are any business transactions that involve more than one party. For example, a company buying

inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the shap ...

from 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. On the other hand, internal transactions only affect one business. Shifting goods between different departments in a business is an internal transaction, since it does not change the overall finances of the company.

References