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.

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.
(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

Frequently Asked Questions

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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