Everyday, every firm experiences a dynamic flow of its money. To keep track of its money, it needs to do bookkeeping.
Bookkeeping is the activity of recording all the financial transactions performed and done by the company. Financial transactions are defined as all occasions that involve a movement of money. They entail a change in the status of the finances of two or more business establishments or individuals.
There are several types of financial transactions that a company regularly engages in. The most common one is purchases. A purchase is an exchange of a good or service for money. This type of transaction decreases the finances of a purchaser but increases that one of the seller.
Another common type of financial transaction is a loan. This involves a business or individual giving a large amount of money to a borrower. The borrower then returns the money to the lender in scheduled repayments. Usually, if repayments are delayed, the borrower pays a larger amount than the original amount that was borrowed in the first place. That’s because the borrower must pay interest, or the difference in these payments.
Mortgage is another type of financial transaction. It is somewhat a combination of loan and mortgage. A company lends a large amount of money to the borrower so that the latter can purchase an expensive item, goods, service, or property. The borrower then agrees to give the item that was purchased to the lender if the loan is not paid back on time. This guarantee is called collateral.
Another financial transaction that a company engages is called a credit card purchase. In this type of transaction, a buyer purchases an item, good, or service. But instead of paying it immediately with cash, the buyer pays the seller with a credit card. Simply said, the transfer of the item is immediate, but the payments are delayed. The purchase, therefore, becomes a loan which the buyer is required to pay on a specific date. Delayed repayments often result to very high interests. Additionally, credit card institutions charge certain fines for delayed payments.
Most, if not all, companies have bank accounts. A bank acts as a lender for a company’s loans and mortgages. Additionally, it acts as a borrower in a special type of loan called an account. The company gives a large amount of money to the bank for safekeeping. The bank, in return, agrees to repay that amount or part of that amount any time the company needs its money.
The bank also pays the company small amounts of interests over a period of time. The bank can also use the money for other financial transactions for as long as the company remains their client.