In this article, we will learn in detail about transaction including its definition, example, features, effects, Dual aspects, and Much more.
What is Transaction?
The most significant and widely used term in accounting is a transaction. Every day, a wide variety of events occur in the business world.
However, not all events are recorded in the accounts. Only events that can be measured in terms of money or resulting in a change in financial position are considered transactions.
The word transaction means “to give” and “to receive” or “to give and take.” There is one benefit recipient, and one benefits provider in every transaction.
For example, Peter gave Williams $1,000. We can see two parties in this transaction. Peter provided $1,000, and Williams received the same amount.
Any event or service that impacts a company’s financial condition will be treated as a transaction.
Any event or service that has an impact on the financial condition of a company will be considered a transaction.
So, it can be said, an event for the exchange of goods or services which is measurable in terms of money or the event by which the financial position of an organization is changed is called a transaction.
Example of Transaction
For example, Paid salary is $4,000, Purchase goods on credit $30,000 both events are transaction because both changes the financial position of the organization.
The appointment of the sales manager, Contact of sales both in the event but not the transaction because it doesn’t change the financial position.
Features or Characteristics of Transaction
We have learned so far that every transaction is an event but that not every event is a transaction.
We will get the following features of a transaction by analyzing its concept:
#1. Measurable in terms of money:
One of the significant features of a transaction is that it must be measurable in terms of money.
For example, a company’s production manager’s death is a loss for the company, but it is not a monetary loss.
However, goods worth $30,000 destroyed by fire are a loss to the company, and it is a transaction.
#2. Changes in financial condition:
Any event that causes a firm’s financial situation to change is considered a transaction.
For example, Mr. Y purchased a piece of furniture for $3,000.
Here, the business’s asset (furniture) has been increased by $3000, while cash has been reduced by $3,000.
This event will be treated as a transaction because it has caused a change in the company’s financial position.
Again, suppose a $3,000 order for furniture is placed. In that case, it is not a transaction because no financial changes have occurred in the business.
#3. Dual entity:
There must be two parties in every transaction. In other words, one party will receive benefits while the other will ensure that the same benefits are provided.
For example – Wages paid to the labor $2,000. Here one party is the wages expense account while the other one is the cash account.
#4. Complete and independent:
Another essential characteristic of transactions is that each one is entirely distinct and unrelated to the others.
For example, suppose Mr. Y sold $20,000 worth of goods on credit and received payment after ten days.
Here, goods sold on credit are a transaction, and the amount received ten days later is a separate account.
#5. Visibility:
Transactions can be both visible and invisible. For example, a delivery van was purchased with $ 50,000 in cash. It is a visible transaction.
At the end of the period, $5,000 was charged as depreciation on the delivery van. It is an invisible transaction.
#6. Historical event:
A historical transaction is a financial transaction that occurred in the past. Transactions are also used to describe events that may happen in the future.
Any future events that change the company’s financial position will be treated as a transaction. For example, a reserve for bad debts, a discount reserve, etc.
#7. Effects on the accounting equation:
Each transaction affects the accounting equation. Events that do not affect the accounting equation are not considered transactions.
For example, a table purchased for $20,000 in cash. By this event, the asset in the accounting equation will increase and decrease by $20,000.
However, when a purchase order is placed for a product, this event has no impact on the accounting equation, so it is not a transaction.
#8. Events of evidence:
If any event is to be a transaction, there must be proof against it, such as invoices, vouchers, cash memos, etc.
#9. Basis of accounting:
It will be considered a transaction whether the transaction is made in cash or arrears. For example, both cash sales and credit sales are transactions.
On a cash basis, it records only cash receipts and payments in the books of accounts. It is not recorded in the accounts book if there is a credit transaction.
The accrual basis is used to record both cash and credit transactions in the accounts book. It is a widely used and widely accepted accounting method.
#10. Exchange of product or service:
There can be no such thing as a transaction if no goods or services are exchanged.
As a result, one party will transact with the other to exchange goods or services.
For example, the property’s purchase and sale allow for the exchange of material goods: professional accountants, doctors, and lawyers trade services.
Read:
Effect of Transactions
Organizing a transaction causes a financial change in the business. This financial change can be broken down into three parts.
1. Structural change:
The structure of a business refers to the position of its assets and ownership. A structural change in the business occurs when there is a change in the assets of the business without any change in profit and loss as a result of the transaction.
For example, a delivery van was purchased with cash. The cash was reduced here, and a new asset called a delivery van was added.
There is no change in ownership as a result of this transaction; only structural change has occurred.
2. Change in ownership:
The transaction may result in a change in the business’s income. And because income or profit-loss changes the ownership of the business, it is possible to say that the transaction causes profit-loss of the business, which changes the ownership of the business.
For example, $5000 worth of goods were sold in the market for $3000. As a result, a $2000 loss was incurred. Ownership was reduced by $2000 as a result of these losses.
3. Invisible change:
Organizing transactions in a business may not be the only visible change. Many times the results of the transaction may be invisible.
For example, depreciation is the loss of value as a result of the use of business equipment. This depreciation is a cost of the business and must be recorded as a transaction.
As a result of this transaction, no cash is expended from the business or any outside party is involved.
Dual Aspect of Transactions
One of the important features of a transaction is the dual aspect. According to the double-entry accounting system, each transaction must have two parties. Because no single party can undertake a transaction.
According to accounting principles, one party gets debited and the other is credited.
A transaction’s dual aspect involves two endpoints. The flow begins at one end and ends at the other; the person who arrives at the other end receives the flow, which is referred to as a debit. And the beginning of the flow is credited.
As a result, in a double-entry accounting system, the dual aspect refers to the two ends of the money flow or its equivalent. This rule applies to all accounting sectors, regardless of individual or institutional accounting, and accounting equations (A=L+OE) have been developed using this principle.
For example:
Mr. Smith purchased one computer for official use for $500; this purchase has the following effects on business:
1. It will increase the business’s assets (computer) by $500 and debit the computer account.
2. It will reduce the business’s other assets (cash) by $500 and credit the cash account.
That is, every transaction has a dual aspect.
So we can say that the essence of the dual aspect is that for any transaction to take place, two parties must debit and credit the same amount of money.
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