What is a 'Third-Party Transaction'

A third-party transaction is a business deal involving a buyer, a seller and a third party. The third party's involvement varies with the type of business transaction.

BREAKING DOWN 'Third-Party Transaction'

When a buyer and seller enter into a business deal, they may decide to use the services of an intermediary or third party who manages the transaction between both parties. The third party’s role may include crafting the particulars of the deal, connecting the two parties with each other, or serving as the means of receiving payment from the buyer and forwarding that payment to the seller.

For example, in the insurance industry, insurance brokers are third-party agents that market insurance products to insurance shoppers. The client is able to work through the broker to secure an optimal insurance contract that has agreeable rates and terms, while the insurance company works through the broker to gain a new client. If the broker is successful in bringing a new client to an insurance provider, it is paid a commission by the insurer. In the same light, a mortgage broker is also considered a facilitator in third-party transactions, as he or she will attempt to match the needs of a potential home buyer with the loan programs offered by a lender.

As technology evolves and changes the way things are done in the digital era, more people and businesses are conducting third-party transactions through online payment platforms. Through the digital platforms, a buyer can make a payment for the purchase of a good or service acquired from another party. The third-party provider receives the payment prompt from the buyer, verifies that the funds are available, and debits the buyer’s account. The money is then forwarded to the seller’s account, typically on the same online portal. The seller’s account may be credited in minutes or days, but the funds may be withdrawn to a bank account or used to conduct other transactions once the deposit has been made in the account. PayPal is one good example of an online payment portal that acts as a third party in a retail transaction. A seller offers a good or service, and a buyer uses a credit card entered through the PayPal payment service. The payment is run through PayPal and is, therefore, a third-party transaction.

Third-party transactions are important for various accounting policies and occur in a variety of situations. Importantly, the third party is not affiliated with the other two participants in the transaction. For example, if Firm A sells inventory to its subsidiary, Firm B, a third-party transaction occurs when Firm B sells those final goods to Firm C.

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