Introduction to Accounting--Transaction and Events

This is the topic studied by the number of students confronting first time with the concepts of accounting, here is my little try to help them understand this basic and root concepts of accounting.

Event:

If accounting were a big tree with lots of branches, an event would be its seed on which the whole tree stands. No accounting is possible without an event.

Now, what is an event? Event is nothing but all the happenings.

“India has won the match” is the happenings that’s why it’s an event, “Ram get married yesterday” is an event-- but business doesn’t care about these events because its financial situation remains unaffected whether or not India won the match, whether or not Ram get married. Business cares only about the events which is expressed in terms of money and which change its financial position; those events are called Financial Events. “Taken a loan of Rs10000 from Ram for business purpose” is a happening express in term of money that’s why it is called financial event because the financial position of the business is affected by the inflow of money into the business as loan. Now we understand that a business cares only about the financial events and it is this financial event on which the accounting stands, it is the seed and at last this financial event in other way, is called Transaction in a business.

If I talk about the proper definition, Transaction is a financial or economic event that affects a change in the financial position of an enterprise.

Now look at the following examples:

“Purchase of goods worth Rs 100000 on credit” is also a transaction though we are not paying money instantly but the inflow of goods in business increases its value by 100000 and thus, its financial position get affected by this, so it’s  transaction.

“Proprietor received a gift of diamond ring worth 1 million” is not a transaction although it has money value of 1 million. It is because it is not related with business of the proprietor and thus, doesn’t affect its financial position.

From the above explanation and examples it is clear that All the events are not transactions but all the transactions are events that is, every transaction is a financial events but every event can’t be a transaction if it does not have financial value and if it’s not related with the business.

Transaction can be of different types:

Transaction can be reciprocal—“sale of goods worth Rs 10000” in this transaction buyer received the goods worth 10000 and seller received the cash of 10000. Thus, economic value has been exchanged directly between two parties equally that’s why it’s reciprocal.

Transaction can be non reciprocal—“payment of tax for Rs 3000 to the government” here there is no mutual benefit between the two parties, govt. is not paying directly anything in return, thus, it is reciprocal.

Transaction can be external:

 Purchasing and selling goods is the external transaction as there is a link between business and outside party.

Transaction can be internal:

Charging depreciation is an example of internal transaction.

Up to this point, it is clear that to call any event a transaction

·       It should be expressed in terms of money.

·       It should change the financial position of an enterprise, entity or company whatever case may be.

Let’s see some more examples:

“Placing an order worth Rs 50000” is not a transaction it doesn’t affect the financial position of an entity; it will affect when the entity will receive the goods and will paid the cash in return. Similarly “appointing an employee for 50000 per month” or “receiving a free samples for 100” are not transactions because they don’t change the financial position of business though they are expressed in terms of money.