Meaning And Types of Transactions In Accounting

Meaning And Types of Transactions In Accounting

Transactions are very important in business. Hence, they are the subject matters of Accounting. Accounting means the systematic way of maintaining of accounts of transactions. For this reason, one should have a very clear and broad knowledge of the concept of transaction before knowing the techniques and principles of accounting.

Every occurrence of human life is called event. Events in Accounting are classified into two groups which are listed below;
1. Monetary events.
2. Non-monetary events.

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EVERY EVENTS ARE NOT TRANSACTIONS.
Only the events which are related to money are the sources of transactions. Transactions are very important elements in Accounting and all the events treated as transactions are recorded in the books of accounting. Other events which are not transactions are not recorded in the books of accounts. In the dictionary, the meaning of transaction is to give and take or exchange.

In every transaction of an individual or business organization, there are two parties or accounts involved. One party receives the benefit (DEBIT) and the other one offers (CREDIT). All the events that occurred which are measurable in terms of money are called transactions.

For example,
Some examples of transactions are: $500 purchase for cash, $200 sale on account, $50 salary payment, etc. Therefore, the exchanges of goods and services measurable in terms of money which bring financial changes to a person or organization are called transactions.

Some modem accountants have further explained the matter in different ways. According to them, any events which bring changes in assets, liabilities and owner’s equity of a business are called transactions. When there are changes in assets, liabilities and owner’s equity, there will be a change of financial position of a business. On the basis of both the traditional and modern concept, transaction means any events that bring about change in financial position of a person or a business organization.

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NATURE AND FEATURES OF ACCOUNTING TRANSACTIONS
As we have learnt earlier, all transactions are events but all events are not transactions. For an event to be called a transaction, it must bear the following features;

CHANGE IN FINANCIAL POSITION
All the event causing a financial change of a business concern is known as transaction. The change of financial position may happen in two ways, they are:
1. Net change.
2. Structural change.

NET CHANGE
The change which is caused by an event in the number of assets and liabilities of a business is called net change. For example, a businesswoman will receive $200/- from David Beckham against credit sale of goods. After being declared insolvent, David Beckham is unable to repay the debt due to him.
As a result, the businesswoman incurs a loss of $200/- being unable to get the payment from Beckham. Therefore, the assets and owner’s equity of the businesswoman will decrease for incurring a loss of $2,000/-. This is a transaction of a business.

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STRUCTURAL CHANGE
The structural financial change means changes between liability to liability or, assets to assets but not the change between assets and liability and vice versa for a particular event. For example, $5,000/- received on account. For this transaction, there is an increase in cash and a decrease in account receivable. This type of change does not bring any financial change to the business but it only brings a structural financial change to a business.

MEASURABLE IN TERMS OF MONEY
For an event to be transaction, it must be measurable in terms of money. Any event which is not measurable in terms of money is not a transaction. For instance, someone gets an umbrella. This event is not considered a transaction because it does not contain the amount of money. But, if someone buys an umbrella for $100 it becomes a transaction because the event has been interpreted in terms of money and causes financial changes to the business.

DUAL ASPECT
Dual aspect states that all transaction will have two parties. One party receives the benefit which is debited and the other offers it (credit). Without the two parties there cannot be any transaction. For example, $100 is paid for sundries. This event contains two parties i.e. accounts – one is sundries account and the other is cash account. In this respect the business concern pays cash and the sundries enjoy the benefit. Since this event contains two accounts or entities, it is called a transaction because it causes financial changes to the business.

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HISTORICAL EVENTS
Any events which occurred in the past are historical events. Historical economic events are also transactions. But there are some events which might occur in the future and they also considered as a transaction. Examples are: reserve for doubtful debts, reserve for discount on debtors.

EVENTS OF EVIDENCE
For an event to be financial transaction, there must be a documentary evidence to support it. For example, a Land worth $5,000/- is purchased for business use. The evidence of this transaction is land purchase and cash memo for purchase.

TYPES / CLASSIFICATION OF ACCOUNTING TRANSACTION
Transactions may be classified into different groups from different points of views;

TYPES / CLASSIFICATION OF ACCOUNTING TRANSACTIONS ON THE BASIS OF INSTITUTIONAL RELATIONSHIP
1. External transactions.
2. Internal transactions.

EXTERNAL TRANSACTION
External transaction is a type of transaction that occur between two persons or two organizations or between a person and organization in terms of money. For a transaction to be external, it must take place between two separate entities.

INTERNAL TRANSACTION
Internal transaction is an economic activity which occurs within a company or a business organization. It is an exchange from one department to another in the same company.

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TYPES / CLASSIFICATIONS OF ACCOUNTING TRANSACTIONS ON THE BASIS OF EXCHANGE OF CASH
1. Cash transactions.
2. Credit transactions.
3. Non¬cash transactions.

CASH TRANSACTIONS
This is a type of transactions which are settled for cash right after their occurrence. Cash transactions means exchanging goods for cash. For example, Mr. Kelvin sold an electric iron for cash for use.

CREDIT TRANSACTIONS
All the transactions which are not settled for cash right after their occurrence are called credit transactions. In most cases, payment is made in the future. For example, Mrs. Mary purchased a car from Stella on a contract that after a month Mr. Johnson will pay for the goods.

NON-CASH TRANSACTION
Any transactions which are not cash transactions and credit transactions are collectively known as non-cash transactions. Examples of non-cash transactions are: depreciation of fixed assets, the return of defective goods purchased earlier etc.

TYPES / CLASSIFICATION OF ACCOUNTING TRANSACTIONS ON THE BASIS OF VISIBILITY
1. Visible transactions.
2. Invisible transactions.

VISIBLE TRANSACTION
Visible transactions involves the sales and purchases of physical commodities or goods. For example, the purchase of the machine, furniture, tools, car etc. Visible transactions are also known as real transactions because they are related to real assets.

INVISIBLE TRANSACTION
Invisible transaction is a type of transaction that we cannot see, feel and touch. Invisible transactions are related to intangible assets. For example, depreciation of fixed assets, amortization of intangible assets, share discount, preliminary expenses etc. belong to this group.

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TYPES / CLASSIFICATION OF ACCOUNTING TRANSACTIONS ON THE BASIS OF OBJECTIVITY
1. Business Transactions.
2. Non-business or non-trading transactions.
3. Personal transactions.
Business transaction
Business transactions are day to day transactions which are incurred for running the business. Examples are: sale, purchase, payment of salary and wages, house rent, various bills, advertisement etc.
Non-business/Non-trading transaction
Non-business transactions can also be referred to as Social service oriented transactions. For example, subscription, donations to various social organization such as, school, orphanage, college, mosque, church club, associations etc.
Personal transaction
Personal transaction is when a person performs transactions in his personal life such as birthday expenditure, marriage ceremony expenditure, marriage day expenditure, travelling expenditure, etc. they are called personal transactions.

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