Lots of events happen in a business organization but all events are not transactions. It is known to all, "All transactions are events but all events are not transactions." What is Event? Event is such a thing that happens in a business organization in a thousand times. But all events would not be important in respect to business life. In the viewpoint of recording transactions, only a little event will be considered as a transaction. Then what is the transaction? Generally, give and take of any goods or services in respect of money or money measurement will be considered as a transaction. But in modern terms events to be taken into account as transactions whenever it changes in the financial position of a person or an organization and also changes in Asset, Liability, and Owner's Equity of a business Instution.
However, to identify a business transaction, we have to follow the following three ways spontaneously.
⇒ (1)Traditional Method- Based on features or
characteristics of the Transaction.
⇒ (2) Modern Method - Based on Accounting Equation
⇒ (3) In a Viewpoint of the Basis of Accounting
(1) Traditional or British Method: The events occurred in a business organization whose either transactions or not transactions should be justified throw the features of transactions.The features of transactions are as follows: (a) Measurable in terms of money (b) Twofold aspect (c) Change in the financial position (i) Net changes in Assets and Liabilities (ii) Structural changed in Assets or Liability individually(d) Independence and self- sufficiency (e) Visibility & Invisibility (f) Historical events (g) Documentary evidence (h) Exchange of goods and services (i) Certainty (j) Recordability
Out of the above features of the Transaction, if Measurable in terms of money, the Twofold aspect, and Changes in the financial position is available in an event then the event will be transaction definitely, otherwise not.
Example: Mr. Noman started a business with a capital of money $5,00,000 cash.
This is a transaction. Because the most important features of a transaction such as Measurable in terms of money, Twofold aspect, and Changes in the financial position are available in the above transaction.⧫ Problem- 1:Mr. Noman is a businessman. Mention which is a transaction or not of the following events occurred in his business: (i) Mr. Noman started a business bringing $5,00,000 in the business as capital.(ii) He purchased furniture of $20,000 for his business.(iii) Goods $50,000 purchased cash.(iv) $6,000 deposited into the bank.(v) He sent a price list to Khan & Brothers.(vi) Khan & Brothers ordered to purchase goods for $10,000.(vii) Goods sold for $20,000.(viii) An employee in his organization died.(ix) The bank charged $200.(x) The bank granted $2,500 on deposited money.∎Solution:(i) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are available in the above transaction.(ii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Furniture Account and Cash Account, and Changes in the financial position are available in the above transaction.(iii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Purchase Account and Cash Account, and Changes in the financial position are available in the above transaction.(iv) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Account and Cash Account, and Changes in the financial position are available in the above transaction. (v) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are not available in the above transaction.
(vi) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money is available, but the Twofold aspect and Changes in the financial position are not available in the above transaction. (vii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Cash Account and Sales Account, and Changes in the financial position are available in the above transaction. (viii) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are not available in the above transaction.(ix) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Charge Account (Interest Expenses) and Bank Account, and Changes in the financial position are available in the above transaction. (x) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Account and Interest Revenue Account, and Changes in the financial position are available in the above transaction.
(2) Modern Method:
This method is based on the Accounting Equation. The modern Accountant especially American Accounting Researchers indicates the events either transaction or no transaction through analyzing Formula of Accounting Equation. If two Accounts of a Transaction change the Equation equally that means the alteration by increasing or decreasing both sides of the equation, then it would be a transaction definitely.
The Accounting Equation is as follows:
➤ A = L + OE
➤ A = L + C - D + R - E
Here, A = Asset
L = Liability
OE = Owner's Equity
C = CapitalD = Drawings / WithdrawalsR = RevenueE = Expenditure
Example: Mr. Zaman invested in business depositing $5,00,000 in a Bank.
It is a Transaction. According to Accounting Equation A = L + OE, the two accounts such as Cash / Bank Account (A) and Capital Account (OE) in the aforementioned transaction changes in the financial position of the business equally.
Problem-2:(i) Mr. Jamal started a business bringing cash $50,000 and bank balance $5,00,000(ii) He has decided to purchase a machine of $20,000.(iii) He paid $300 for import duty.(iv) He sold goods $40,000 on account to Mr. Arman
(3) In a Viewpoint of the Basis of Accounting:
We can also justify all business events that are either a transaction or not transaction through the Basis of Accounting. It can be classified into two ways:
(a) Cash Basis of Accounting and
(b) Accrual Basis of Accounting
(a) Cash Basis of Accounting:
Either expense or income of money whenever incurred and earned the accounts of the transactions recorded considering expenses payment time and income receipt time is called Cash Basis of Accounting.
(b) Accrual Basis of Accounting:Either expense or income of money whenever paid and received the accounts of the transactions recorded considering expenses incurred time and income earned time is called Accrual Basis of Accounting.
∎Classification of Transactions based on Accounting:
According to the Basis of Accounting all transactions of Accounting can be segregated in three ways which are cited as follows:
(i) Only Cash Basis Transaction:
On January 1. Salaries expense paid to Employees of $5,000.
(ii) Only Accrual Basis Transaction:
Salary expense $2,000 for the month of December of the current year is payable or outstanding.
(iii) Both Cash and Accrual Basis of Transaction:
On January 20. House rent expense paid $ 36,000 for three years.
∎Examples of events that are not transactions:
Examples of events that are not transactions are as follows: (a) Agreements or contracts of purchasing and selling goods; (b) Death of any employees;
(c) Death of the owner or owner's relatives;
(d) Submission of order for purchasing goods; (e) Reducing the prices of goods; (f) Submission of Tender; (g) Taking the decision to purchase & sales or the completion of any work. (h) Employment of any worker of officer, etc.
⇒ (3) In a Viewpoint of the Basis of Accounting
The events occurred in a business organization whose either transactions or not transactions should be justified throw the features of transactions.
The features of transactions are as follows:
(a) Measurable in terms of money
(b) Twofold aspect
(c) Change in the financial position
(i) Net changes in Assets and Liabilities
(ii) Structural changed in Assets or Liability
individually
(d) Independence and self- sufficiency
(e) Visibility & Invisibility
(f) Historical events
(g) Documentary evidence
(h) Exchange of goods and services
(i) Certainty
(j) Recordability
Out of the above features of the Transaction, if Measurable in terms of money, the Twofold aspect, and Changes in the financial position is available in an event then the event will be transaction definitely, otherwise not.
Example: Mr. Noman started a business with a capital of money $5,00,000 cash.
This is a transaction. Because the most important features of a transaction such as Measurable in terms of money, Twofold aspect, and Changes in the financial position are available in the above transaction.
⧫ Problem- 1:
Mr. Noman is a businessman. Mention which is a transaction or not of the following events occurred in his business:
(i) Mr. Noman started a business bringing $5,00,000 in the business as capital.
(ii) He purchased furniture of $20,000 for his business.
(iii) Goods $50,000 purchased cash.
(iv) $6,000 deposited into the bank.
(v) He sent a price list to Khan & Brothers.
(vi) Khan & Brothers ordered to purchase goods for $10,000.
(vii) Goods sold for $20,000.
(viii) An employee in his organization died.
(ix) The bank charged $200.
(x) The bank granted $2,500 on deposited money.
∎Solution:
(i) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are available in the above transaction.
(ii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Furniture Account and Cash Account, and Changes in the financial position are available in the above transaction.
(iii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Purchase Account and Cash Account, and Changes in the financial position are available in the above transaction.
(iv) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Account and Cash Account, and Changes in the financial position are available in the above transaction.
(v) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are not available in the above transaction.
(vi) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money is available, but the Twofold aspect and Changes in the financial position are not available in the above transaction.
(vii) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Cash Account and Sales Account, and Changes in the financial position are available in the above transaction.
(viii) Not Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect, and Changes in the financial position are not available in the above transaction.
(ix) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Charge Account (Interest Expenses) and Bank Account, and Changes in the financial position are available in the above transaction.
(x) Transaction ↣ Because the most important features of a transaction such as Measurable in terms of money, the Twofold aspect such as Bank Account and Interest Revenue Account, and Changes in the financial position are available in the above transaction.
(2) Modern Method:
This method is based on the Accounting Equation. The modern Accountant especially American Accounting Researchers indicates the events either transaction or no transaction through analyzing Formula of Accounting Equation. If two Accounts of a Transaction change the Equation equally that means the alteration by increasing or decreasing both sides of the equation, then it would be a transaction definitely.
The Accounting Equation is as follows:
➤ A = L + OEThis method is based on the Accounting Equation. The modern Accountant especially American Accounting Researchers indicates the events either transaction or no transaction through analyzing Formula of Accounting Equation. If two Accounts of a Transaction change the Equation equally that means the alteration by increasing or decreasing both sides of the equation, then it would be a transaction definitely.
The Accounting Equation is as follows:
➤ A = L + C - D + R - E
Here,
A = Asset
L = Liability
OE = Owner's Equity
C = Capital
L = Liability
OE = Owner's Equity
C = Capital
D = Drawings / Withdrawals
R = Revenue
E = Expenditure
Example: Mr. Zaman invested in business depositing $5,00,000 in a Bank.
Example: Mr. Zaman invested in business depositing $5,00,000 in a Bank.
It is a Transaction. According to Accounting Equation A = L + OE, the two accounts such as Cash / Bank Account (A) and Capital Account (OE) in the aforementioned transaction changes in the financial position of the business equally.
Problem-2:
(i) Mr. Jamal started a business bringing cash $50,000 and bank balance $5,00,000
(ii) He has decided to purchase a machine of $20,000.
(iii) He paid $300 for import duty.
(iv) He sold goods $40,000 on account to Mr. Arman
(3) In a Viewpoint of the Basis of Accounting:
We can also justify all business events that are either a transaction or not transaction through the Basis of Accounting. It can be classified into two ways:
(a) Cash Basis of Accounting and
(b) Accrual Basis of Accounting
(b) Accrual Basis of Accounting
(a) Cash Basis of Accounting:
Either expense or income of money whenever incurred and earned the accounts of the transactions recorded considering expenses payment time and income receipt time is called Cash Basis of Accounting.
(b) Accrual Basis of Accounting:
Either expense or income of money whenever paid and received the accounts of the transactions recorded considering expenses incurred time and income earned time is called Accrual Basis of Accounting.
∎Classification of Transactions based on Accounting:
According to the Basis of Accounting all transactions of Accounting can be segregated in three ways which are cited as follows:
(i) Only Cash Basis Transaction:
On January 1. Salaries expense paid to Employees of $5,000.
(ii) Only Accrual Basis Transaction:
Salary expense $2,000 for the month of December of the current year is payable or outstanding.
(iii) Both Cash and Accrual Basis of Transaction:
On January 20. House rent expense paid $ 36,000 for three years.
∎Examples of events that are not transactions:
Examples of events that are not transactions are as follows:
(a) Agreements or contracts of purchasing and selling goods;
(b) Death of any employees;
(c) Death of the owner or owner's relatives;
(d) Submission of order for purchasing goods;
(e) Reducing the prices of goods;
(f) Submission of Tender;
(g) Taking the decision to purchase & sales or the completion
of any work.
(h) Employment of any worker of officer, etc.
Comments