TRANSACTIONS AND ACCOUNTING EQUATION

TRANSACTIONS AND ACCOUNTING EQUATION
The main function of an accountant is to record properly the financial transactions of a business in the books of accounts and to ascertain its true result at the year end. Thus transaction is the tion of accounting - the first and formest element of accounting. In a word, it is the life and blood of ting. Hence the accountant must have a fair idea about the term "transaction."
In ordinary language "transaction" means exchange of something. But in Accounting it is used in a sense. If the financial position of a business concern changes on the happening of en event \ it measurable in terms of money, that event is regarded as a "transaction " in Accounting.
Or
A business event which can be measured in terms of money and which must be recorded i* r of account is called a "transaction ".
IT IS AN EVENT?
In ordinary language "Event" means anything that happens. Human life is fall of events. So many take place in the family and social life of a person. The events may be classified into two:
Monetary Events:
Events which are related with money, i.e. which change the financial position of a person are as "monetary events". For example, daily shopping, marriage ceremony, birthday anniversary, anniversary etc,
Non-Monetary Events:
Events which are not related with money i.e. which do not change the financial position of a person >wn as "non-monetary events". For example, winning a game, delivering a lecture in a meeting etc.
In business accounting only those events which change the/manciaj position of the business and t call tor accounting are recognised as "Events". In other words, all monetary events are regarded as tess transactions."
Remember, it is not that anything which- results in exchange of something will be regarded as action. On the other hand, something may be regarded as a transaction even though it involves no age. For example, Rehman sends a price-list to his customer, Akram. This involves exchange of price-sweet Rehman and Akram, yet it is not regarded as a transaction, because it is not measurable in of money and it does not change the financial position of both the persons. Again, suppose, goods Rs. 1000 are destroyed by fire. This does not involve any exchange, yet it is regarded as a* transaction, te it is measurable in terms of money and it changes me financial position of the business.
It must be noted that an event* although measurable in terms of money, may not be regarded as a on. For example, we receive an order for supply of goods worth Rs. 1000. Although it is able in terms of money, it is not regarded as 3 transaction, since it has not changed the financial 41. It will, however, be regard as transaction when the goods are supplied according to that order
It appears from the above discussion that the following two conditions must be satisfied in that an event may-be regarded as a transaction in Accounting;
The event must be measurable hi terms of money.
The financial position of the business must change on account of that event..
Features:
To. become a transaction an event must have the following features; 1. THERE MUST BE TWO PARTIES:
No transaction is possible without two parties. Just as it takes two hands to clap, so it takes parties for a transaction to take place. There cannot be a giver unless there is,a receiver. Suppose. borrows Rs. 10,000 from a bank. This is a transaction, since there are two parties here - X and bank.
2.
money 3.
THE EVENT MUST BE MEASURABLE IN TERMS OF MONEY;
An event will not be regarded as a transaction, unless it is capable of being measured in terms
THE EVENT MUST RESULT IN TRANSFER OF PROPERTY OR SERVICE:
Suppose, we buy a motor-car from Saleem for Rs. 40000. This results in transfer of property Saleem to us, so it is a transaction. Again suppose, we pay salary to our employee Rs. 2000. This results \ transfer of service - the employee renders service and we receive it So it is a transaction.
4. THE EVENTS MUST CHANGE THE FINANCIAL POSITION OF THE BUSINESS:
Transaction takes place only when there i& a change, in the financial position of the business. change in financial position may be of two kinds:
(a) Quantitative change:
This changes the total value of assets and liabilities of a business concern. Suppose, machinery Rs 20,000 is destroyed. This reduces the total value of the assets of the business. As a result, the final position changes and hence it is a transaction, .
(b) Qualitative change:
This causes increase or decrease in the different elements of assets, or liabilities, but the value \ total assets and total liabilities remains unchanged. Suppose, we buy machinery worth Rs. 50,000. results in exchange of properties - cash Rs. 50,000 goes out of our possession and at the same til machinery of an equal value comes into our possession. This does not change the total value of our as but most causes a qualitative change in our financial position, hence it is a transaction.