What is a transaction– Explanation

Any event that takes place between two or more persons or things and that event affects the financial position of the business and also that event must be expressed in terms of money, then we can say that the transaction is occurred in the business.

Explanation: From the definition, we must consider the following terms in order to understand the definition of transaction:

1. Event

Event means "Anything that happens". There are two types of events:

1. Monetary Events

Those events that involve the use of money and that event can change the financial position of the business. Examples of such are transportation expenses, ceremonial expenses, etc.

2. Non-Monetary Events

Such events which do not involve the use of money and that events do not change the financial position of the business are called Non-Monetary Events. Examples are delivering the speech, Dancing, etc.

But in Accounting Event has special meaning. In Accounting only those events are considered that are related to money and that change the financial position of the business. So, only those Monetary Events are recorded in the books of accounts which can change the financial position of the business.

Three Important Examples to understand Transactions.

1. Exchange of Things between two persons but not treated as Transaction

Mr. A (Seller) gives a list of price to Mr. B (Buyer), then Mr. B returns it to Mr. A. This involves exchange of things between two persons. Mr. B receives the price list and Mr. A receive price list after seeing and reading price list gives it to Mr. A. But this exchange does not treated as transaction as this is not monetary transactions and it can not change the financial position of the business.

2. No Exchange but treated as Transaction

When goods worth Rs.10,000 are destroyed by fire or goods damaged or goods lost by theft, then there is a transaction taken place, because it is measurable in terms of money and it changes the financial position of the business, even though there is no exchange.

3. Event is monetary but not Transaction

Mr. A (Supplier) receives an order for the supply of Goods worth Rs. 50,000 from the buyer Mr. B. This order is expressed in term of money but it is not treated as transaction as it is only an intimation to purchase the goods and it does not change the financial position of the business. After the receipt of order, if Mr. B purchases the goods, then it is treated as transaction.

Results:

From the above Explanation, we conclude that in Accounting Transaction takes place only when following two conditions are fulfilled:

1. The Event must be expressed in terms of money.

2. The Event must change the financial position of the business.

Characteristics / Features of An Event:

1. Two Persons / Things

For a transaction to take place there must be at least two persons or things. One person receives and other person gives something.

For Example, Mr. A sold goods for Cash Rs.40,000 to Mr. B, then there is transaction as Mr. A gives goods and receives Cash from Mr. B.

2. Event should be measurable in terms of Money. For Example, Mr. A sold goods for Cash Rs.40,000 to Mr. B can be expressed in terms of money i.e. Rs.40,000 is expressed in terms of money, so it is a transaction.

3. Transfer of Property or service from one person to another. For Example, Mr. A Sold goods for Cash Rs.60,000 to Mr. B, then there is transfer of property (goods) from Mr. A to Mr. B. Similarly, if we pay salaries to our employees for the services they rendered for our business, then there is transfer of service from our employees to our business.

4. Event should change the financial position of the business. The change in financial position of business is taken place in the following two ways:

  (i) Quantitative Change

  (ii) Qualitative Change

   (i) Quantitative Change

It means changing in the value of assets and equity. Suppose, The goods worth Rs.30,000 are destroyed by fire, then the value of Closing Stock decreases and as a result, the total value of assets in the assets are decreased and financial position of the business is also declined. So, there is a quantitative change in the financial position of the business.

   (ii) Qualitative Change

Under this change, the total value of assets and equity remains same, but the value of different elements of assets and equity is changed.

 For Example, When we purchase Furniture from our supplier for Rs.50,000, then the total value on both sides of Balance Sheet remains same but the value of assets on Assets side is increased by Rs.50,000 and the value of liabilities on Liabilities& Owner's Equity is also increased. Hence there is a qualitative change in the financial position of the business.