Transaction Definition

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What is meant by the term transaction?

Any event that changes the financial position of a business concern and that must be recorded in the books of accounts is called a “Transaction“.

It should be remembered that a transaction should be expressed in terms of money and should bring a change in the financial position of a business.

Or

Transactions are the business events, measured in money, and recorded in the financial record of a particular enterprise.

Example:

  1. “Goods purchased” is a transaction.
  2. “Goods sold” is a transaction.
  3. “Goods lost by fire” is a transaction

State with reasons whether the following events are transactions or not to the business of Mr. A?

(a). Mr. A started a business with cash $100,000.
(b). Paid salaries to staff $12,000
(c). Purchased machinery for cash $40,000.
(d). Placed an order with Marry & Co. for goods for $8,000.
(e). Mr. John was appointed as accountant on a salary of $16,000 per month.
(f).  Received a price list from Mr. B.
(g). Amount withdrew by Mr. A for personal use $10,000.
(h). Received interest from City Bank $1,500.
(i).  Received free samples $500.
(j). There was theft in the business office of cash $15,000.

Also Check:  Temporal Method Definition

Solution

Here all the events will be analyzed from the point of view of Mr. A’s business. Only those events will be given the status of a transaction which can be measured in terms of money and which change the financial position of the business.

(a). This is a transaction because it can be measured in terms of money and will change the financial position of the business. Cash will increase by $1,00,000 and capital will increase by Rs.1,00,000.

(b). It is a transaction because it will change the financial position of the business. Cash will decrease by $12,000 and salaries (expense) will increase by $12,000.

(c).  It is a transaction as it will change the financial position of the business. Machinery will increase by $4,000 and cash will decrease by $4,000.

(d, e, f). It is not a transaction because it will not change the financial position of the business.

(g). It is a transaction because it will change the financial position of the business. Cash will decrease by $10,000 and owner’s equity will also decrease by $10,000.

(h). It is a transaction as it will change the financial position of the business. Bank interest will be increased by $500 and cash will also be increased by $500.

Also Check:  T Account Definition

(i). It is not a transaction as it will not change the financial position of the business.

(g). It is a transaction as it will change the financial position of the business. Cash will decrease by $10,000 and owner’s equity will decrease by $10,000.

A transaction is of two kinds:

  1. Cash Transaction.
  2. Credit Transaction
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