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.
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