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A financial transaction is an
agreement Agreement may refer to: Agreements between people and organizations * Gentlemen's agreement, not enforceable by law * Trade agreement, between countries * Consensus, a decision-making process * Contract, enforceable in a court of law ** Meeting ...
, 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 inqui ...
, 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 ...
, 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 ...
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 ar ...
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 ...
or
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 ...
. 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 A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term '' plastic card'' includes the above and as an identity document. These are similar to a credit card, but u ...
, or cheques. The other main form of payment is
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
, 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 In trade, barter (derived from ''baretor'') is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists disti ...
. 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 Anthropological theories of value, valuables are not sold, but rather given without an explicit agreement for immediate or future rewards. Social norms and customs govern giving a gift ...
and
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
. 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 by the
Babylonians Babylonia (; Akkadian: , ''māt Akkadī'') was an ancient Akkadian-speaking state and cultural area based in the city of Babylon in central-southern Mesopotamia (present-day Iraq and parts of Syria). It emerged as an Amorite-ruled state c. 1 ...
, 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 money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representa ...
objects whose value comes from their intrinsic value. These often included gold or silver coins, along with non-metal objects such as
cowrie shells Cowrie or cowry () is the common name for a group of small to large sea snails, marine gastropod mollusks in the family Cypraeidae, the cowries. The term ''porcelain'' derives from the old Italian term for the cowrie shell (''porcellana'') ...
, 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 th ...
. 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 sometim ...
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 ins ...
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 Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...
, currency that is stored on electronic systems, have gained popularity.
Bitcoin Bitcoin (abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
, invented in 2009, reached a cap of over US$1 trillion in 2021. One of the downsides of
cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It ...
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 A coin is a small, flat (usually depending on the country or value), round piece of metal or plastic used primarily as a medium of exchange or legal tender. They are standardized in weight, and produced in large quantities at a mint in order t ...
or cash, or with a
debit card A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term '' plastic card'' includes the above and as an identity document. These are similar to a credit card, but ...
. 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 ...
are an example of when credit is used, where the card issuer (usually a bank) gives the customer a
line of credit A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A line of credit takes s ...
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 distin ...
for the issuer.
Loans In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that de ...
and
mortgages A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
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 An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
". Mortgages are similar to loans, but are usually for a larger amount of money and over a longer term, often for buying
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
. Mortgages are almost always secured by
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
, 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 mort ...
.


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 sha ...
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 Department may refer to: * Departmentalization, division of a larger organization into parts with specific responsibility Government and military *Department (administrative division), a geographical and administrative division within a country, ...
in a business is an internal transaction, since it does not change the overall finances of the company.


See also

*
Financial transaction tax A financial transaction tax (FTT) is a levy on a specific type of financial transaction for a particular purpose. The tax has been most commonly associated with the financial sector for transactions involving intangible property rather than re ...
*
Teeming and lading Teeming and lading is a bookkeeping fraud also known as short banking, delayed accounting, and lapping. It involves the allocation of one customer's payment to another customer's account to make the books balance, often to hide a shortfall or the ...
*
E-commerce E-commerce (electronic commerce) is the activity of electronically buying or selling of products on online services or over the Internet. E-commerce draws on technologies such as mobile commerce, electronic funds transfer, supply chain manag ...


References

{{DEFAULTSORT:Financial Transaction Payment systems