What is Transactions? Types of Accounting Transactions

What is Transactions? Types of Accounting TransactionsTransactions are the subject matters of Accounting. Accounting means maintaining of accounts of transactions systematically.

For this reason one should have clear conception of transaction before knowing techniques and principles of accounting.

Any occurrence of human life is generally called event.

Events is Accounting are classified into two groups;

(1) Monetary events.
(2) Non-monetary events.

All events are not transactions. The events related to money are the sources of transactions. Transactions are very important elements in Accounting. Events treated as transactions are recorded in the books of accounting.

Events other than transactions are not recorded in the books of accounts. The dictionary meaning of transaction is to give and take.

In every transaction of an individual or organization two parties or accounts are involved. One party receives the benefit and the other one offers. Events occurred measurable in terms of money are called transactions.

For example,

$1,000 purchase for cash, $2,000 sale on account, $500 salary payment etc. are all transactions.

Therefore, the exchanges of goods or services measurable in terms of money which bring financial changes of a person or organization are called transactions.

The modem accountants have explained the matter in different ways. According to them the events which bring changes in assets, liabilities and owner’s equity of any business concern are called transactions. In fact both the concepts bear the same meaning.

One states the changes of financial position and the other states changes of assets, liabilities and owner’s equity. Changes in assets, liabilities .and owner’s equity lead to the change of financial position.

On the basis of traditional and modem concept transaction means the events that bring change in financial position or change in assets, liabilities and owner’s equity of a person or an organization.

Some definitions of famous thinkers;

Noble and Niseonger say, “Any happening which brings change in the pattern of assets or liabilities or proprietorship of a business concern is a financial transaction to it.”

Hermanson, Edward and Salmon say, “Transaction is a recordable happening or event that affects the assets, liabilities, owner’s equity, revenue or expense of event.”

Nature and Features of Accounting Transactions

All transactions are events but all events are not transactions. An event to be a transaction must bear the following features;

Change in financial position

The event causing financial change of a business concern is called transaction. The change of financial position may occur in two ways:

  1. Net change: The change caused by an event in the quantity of assets and liabilities of a business is called net change.For example,a businessman will receive $2,000/- from Mohammad Ali against credit sale of goods. Being declared insolvent Mr. Ali is unable to repay the debt due to him. As a result the businessman incurs a loss of $2,000/- being unable to realize the amount from Ali. The assets and owner’s equity of the businessman will decrease for incurring loss of $2,000/-. It’s a transaction of a business.
  2. Structural change: Structural financial change means changes between assets to assets or, liability to liability but not the change between assets and liability for a particular event.For example,$5,000/- received on account. For this transaction cash increases and account receivable decreases. This sort of change does not bring any financial change to the business but brings structural financial change of a business. These sorts of events are called transactions. This is a qualitative change. This sort of change is called qualitative change.

Measurable in terms of money

An event must be measurable in terms of money to be a transaction. Event which is not measurable in terms of money is not transaction. For example, someone gets a pen. This event is not transaction, because it does not contain the amount of money.

But, if someone purchases a pen for $100 it becomes a transaction because the event has been expressed in terms of money and causes financial changes to the business.

Dual aspect

Every transaction will have two parties. One party receives the benefit and the other offers it. Without two parties there cannot be any transaction. This feature of transaction is called dual aspect.

For example, $100 is paid for salary.

This event contains two parties i.e. accounts – one is salary account and the other is cash account. In this respect the business concern pays cash and the employees enjoy the salary benefit. As this event contains two accounts or entities, it is a transaction. It causes financial changes to the business.

Self-sufficient and independent

Every event is self-sufficient and independent of each other. An event may have relation with other events but these two events cannot be considered as same event, one is separate and independent of other.

For example,

Angel sells commodities worth $2,000/- to his customer on credit and after three days he receives $ 1,500/- from his debtor.

In this case though one transaction is related to other transaction these are two independent transactions. One is separate from other.

To sell goods worth $ 2,000/- on credit is a transaction and realization of $ 1,500/- from debtor is another transaction.

These two transactions are not considered one transaction. As per principles of Accounting these two transactions are to be recorded separately.

Invisible transactions

It is not necessary that a transaction bringing financial change will always be a visible transaction, it may be invisible also. Invisible event may also be a transaction.

For example, a machine is purchased for $2,000/-.

Through use the value of machine will definitely decrease. Decrease of value through uses is called depreciation.

For example, the machine is used for one year and during this one year period its value decreases by 10% i.e. $200/-.

This decrease of value of $200/- is depreciation expense. Depreciation of $200/- is the loss of a business, but this event is not visible. Despite of its being invisible it is a transaction.

Historical events

Events occurred in the past are historical events. Historical economic events are also transactions.

But sometimes the events which might occur in future are also considered as transaction. For example, reserve for doubtful debts, reserve for discount on debtors.

Events of evidence

An event to be financial transaction must be supported by documentary evidence. This evidence may be related to documents or materials.

For example,

a machine worth $3,000/- is purchased for a business.

The evidence of this transaction is machinery purchase and cash memo for purchase.

Basis of Accounting

On the basis of system of keeping accounts events are treated as transactions. Some events are treated as transactions on cash basis and some are on accrual basis.

For example, cash sale $200/- is a transaction.

Again sale of goods worth $200 on credit is also a transaction.

Types / Classification of Accounting Transactions

Transactions may be classified in different groups from different points of views;
On the basis of institutional relationship: (a) External transactions (b) Internal transactions.

  1. External transactions: Transactions of goods or services in terms of money are called external transaction or business transaction.In other words,the transactions that occur between two persons or two organizations or between a person and organization in terms of money are called external transactions or business transactions.For example, we purchase a machine for $100,000 from Laila and Co.
  2. Internal transactions: The transactions relating adjustment of depreciation of fixed assets, income receivable, expenditure payable or any matter after a certain period are called internal transactions or transactions relating to accounts.For example,the value of a machine decreased through uses, salary payable, interest receivable etc.

On the basis of exchange of cash:

(a) Cash transactions.
(b) Credit transactions.
(c) Non¬cash transactions.

  1. Cash transactions: The-transactions which are settled for cash right after their occurrence are called cash transactions. Cash means money, cheque, bank draft etc.For example,Mr. Zaved purchased an electric fan for cash for use in his shop.
  2. Credit transactions: The transactions which are not settled for cash right after their occurrence are called credit transactions. In this case after a certain period cash payment is made.For example,Mr. Haroon purchased a machine from Rahman on a contract that after a month Mr.  Haroon will pay the price.
  3. Non-cash transaction: When there is no question of payment of price on the date of occurrence or in future are called non-cash transactions.In other words all the transactions other than cash transactions and credit transactions are collectively called non-cash transactions.There is no trace of these transactions anywhere except in the books of accounting. For this reason it is called transactions in papers or transactions in books of accounts.For example,my fifty thousand dollar is stolen. In it my financial position changes – assets worth 50,000/- decreases, but the question of settlement of this transaction for cash does not arise.Therefore it is a non-cash transaction. In the similar way depreciation of fixed assets, return of defective goods purchased earlier etc. are non-cash transactions.

On the basis of visibility:

(a) Visible transactions.
(b) invisible transactions.

  1. Visible transaction: The results or effects of those transactions which are visible are called visible transactions. For example, purchase of machine, furniture, tools, car etc.: Visible transactions are also called real transactions. Because these transactions are related to real assets.
  2. Invisible transaction: The results or effects of those transactions which are not visible are called invisible transactions. For example, depreciation of fixed assets, amortization of intangible assets, share discount, preliminary expenses etc. belong to this group.

On the basis of objectivity:

(a) Business transactions.
(b) Non-business or non-trading transactions.
(c) Personal transactions.

  1. Business transaction: Day to day transactions those are incurred for running the business is called business transactions. Such as, sale, purchase, payment of salary and wages, house rent, various bills, advertisement etc.
  2. Non-business/Non-trading transaction: Social service oriented transactions are called non-business or non-trading transactions.For example,subscription or donation to various social organization such as, school, college, mosque, church club, associations etc.
  3. Personal transaction: A person performs transactions in his personal life such as birthday expenditure, marriage ceremony expenditure, marriage day expenditure, festival expenditure, children’s education expenditure etc. which are called personal transactions.