The main functions of Accounting are to identify and record financial transactions of an individual, business concern or any other concerns in the books of accounts accurately and to prepare financial statements at the end of the period to ascertain results and exhibit financial position.
Transaction is the basis of Accounting. It is the first and foremost element of Accounting, in a word life and blood of Accounting.
As a producer cannot produce any product without raw material so also the accountant cannot maintain accounts without transaction. So accountant must have clear conception about the meaning of transaction.
One should have knowledge regarding the source from which the concept of transaction has developed before going to detail discussion of transaction.
Transactions are financial events of an individual or a business concern. Therefore the financial events are the main bases of transaction.
In general sense event means happening of something. Human life is full of events. Each and every personal, social, national and economic activities of a person are an event.
In this context A.L. Kholer says, “Event refers to a process or a part of a process having a particular moment and a place of occurrence.” Innumerable activities that are taking place in the greater field of human life are classified into two groups; (1) Non-monetary event (2) Monetary event.
- Non-monetary event: The events which are not related to money or money’s worth i.e. occurrence of which does not bring any financial change are called non-monetary events. For example, writing of book, passing examination, winning game, deliberation of speech, placing order for goods etc.
- Monetary event: The events that are related to money or money’s worth i.e. occurrence of which brings financial changes of a person or an organization are called monetary events.For example, day to day shopping expenditure, expenditure for birthday, receiving gifts on birthday from relatives, home building expenditure, payment of house rent etc.
From accounting point of view only those events which bring changes in the financial position of a person or an organization and for which keeping of accounts is needed are recognized as financial events. That is, all financial events are considered as events in Accounting.
If any particular event or events measurable in terms of money individually or collectively bring(s) financial change of person or an organization are called events in Accounting. In short, the events that bring financial changes are called transactions.
Characteristics of an Event
- Short-term: Many events are of short-term. Some events may be completed in a day. For example, daily shopping. Again completion of some events may take few days or few weeks. For example, marriage ceremony, centenary, cultural programme etc.
- Non-profitable: There might occur some events in personal, social and family life of an individual without profit making motive. For example; daily shopping, marriage ceremony, Christmas or Eid festival etc.
- Independent and self-sufficient: As every event creates a unit of accounting and as it needs complete individual accounting, it has got its self-sufficient and independent entity.
- Cash: Every event as transaction is to be settled for cash. If any transaction is made on credit the payment of it is to be made at a later date as per terms and condition.
- Limited transaction: As the events are of short term in nature their numbers are also limited.
- Definite objective: Every event is objective or sub-objective oriented.
- Interest: Events may be interest oriented or interest less.
- Completion: Just after fulfillment of the objective or sub-objective for which an event takes place, the event comes to an end. Generally on completion of events related transactions also come to end. Cash events have no after effect of occurrence.
Nature of Events
All events are not of same nature. On the basis of nature events are classified into the following three classes.
- Daily shopping: Every family is to purchase some essential commodities daily from the market to meet day to day requirements. The daily shopping events end within the day.
- Family festivals: Family festivals mean marriage ceremony, birthday celebration, Eid etc. Every family is to observe all these occasion more or less. These types of events are limited to a day or more.
- Social functions: Social functions denote the functions arranged on the occasion of any social or religious cause or on the occasion of any festival. For example, birth day celebration of any great personality, sports, news conference etc. People from different walks of life attend these functions together.These sorts of functions are not arranged by a single man or family. These are generally arranged by some clubs, association, political parties, educational institutions etc. because, these types of functions are arranged extensively and are so expensive that a single person or family normally cannot bear. These expenses are met by financial helps from general people.
Accounting is essential only for economic events. Accounting of events means systematic recording, classification and summarization of the events and preparing financial statement and communicating information through analysis.
Accounting reveals true and financial picture. In the light of above discussion accounting process of events may be classified in four stages;
- Summarization, and
- Preparation of financial statements.
Accounting processes of business concern are also of these four stages. In preliminary stage transactions are journalized.
It is called recording. In the second stage recorded transactions are posted in the ledger in classified and condensed form.
This function is called classification. In the third stage, ledger account balances are recorded in a statement at the end of the year which is called summarization.
In the fourth and final stage financial statements are prepared at the end of the accounting period.