Definition: An internal transaction is an economic activity within in a company that can affect the accounting equation. In other words, it’s an exchange from one department to another in the same company that changes something in the accounting equation.
A good example of an internal transaction is the use of supplies. For example, the shipping department keeps basic supplies like packaging tape, papers, and boxes on hand to ship products. These are regular supplies that are expenses on the income statement.
Assume that the office and administrative department is reorganizing the office and they need boxes to more files and books in the office. The shipping department can “sell” the boxes to the office department. Now obviously this isn’t a true sale and the office department doesn’t actually pay the shipping department for the supplies, but this internal transaction does affect the accounting equation.
What Does Internal Transactions?
Supplies were taken from the shipping department and expensed by the office department. This can also occur with shipping department assets. For example, if the office department wanted to upgrade its computers and decided to give its older office computers to the shipping department, the shipping department would receive a new asset.
Since these are internal transactions, they take place within one company. In other words, the company is transacting with itself. There is no real economic exchange of value between two parties because the company is exchanging value with itself. In essence, the business is taking an asset or expense out of its left pocket and putting the asset or expense in its right pocket.
The accounting equation is altered slightly, but there is no real substantial change in financial position. External transactions, on the other hand, take place between two entities and do change the financial position of both companies.