A car loan is an example of a purely financial transaction.
Any change in the finances of at least two companies or individuals can be a financial transaction. Financial transactions occur when someone chooses to present a payment in exchange for an asset. In accounting, a transaction is considered a financial transaction only if it involves only cash, as opposed to a purchase where cash is exchanged for a good or service. Examples of this type of financial transaction include borrowing money and depositing money into a checking or savings account.
Whenever money flows between companies or individuals, this flow is called a transaction. The flow of money between two accounts within an organization can also be called a transaction if treating it as such helps the business accurately track its finances.
There are three main types of transactions. Most people are more comfortable with product transactions, which track the buying and selling of products. Purchasing a pack of gum is a product transaction between the gum chewer and the store where the gum is purchased.
A distributive transaction controls how money is distributed among workers, the production process, and the government. The paycheck that the gum company writes to the workers at the gum factory is an example of a distributive transaction. Sales tax and income tax are also recorded as distributive transactions.
Financial transaction is a broader category than the first two. It is any gain from a financial asset or liability. Financial transactions can be purely financial. Most of the time, financial transactions are a hybrid of a financial transaction and one of the other two types of transactions.
A loan is a perfect example of a purely financial transaction. The borrower asks for a certain amount of money to make a big purpose, for example, a car. The creditor pays a lump sum. For months or years, the borrower repays the money with interest. The net worth of the borrower and lender changes several times over the course of the transaction, but nothing changes hands except currency.
Buying that pack of gum with a credit card is an example of a combination of a financial transaction and a product. The convenience store gives out gum. To pay, the gum asks for a small loan from the financial institution that issued its credit card. The gum chewer signs a receipt telling the credit card company to pay the convenience store the value of the gum. Thus, the product transaction takes place between the gum and the convenience store, but the financial transaction takes place between the two and a financial institution.