Transaction is an
event. All events are not accounting transactions.
An event must have the following features to become
1. There must be two parties:
No transaction is
possible without two parties. Just as it takes two
hands to clap, so it takes two parties for a
transaction to take place. There cannot be a giver
unless there is a receiver. Suppose, X borrows
$10,000 from a bank. This is a transaction, since
there are two parties here - X and bank.
2. The event must be measurable in terms of
An event will not
be regarded as a transaction, unless it is capable
of being measured in terms of money.
3. The event must result in transfer of property
Suppose, we buy a
motor-car from S for $40000. This results in
transfer of property from S to us, so it is a
transaction. Again suppose, we pay salary to our
employee $2000. This results in transfer of service
- the employee renders service and we receive it. So
it is a transaction.
4. The event must change the financial position
of the business:
place only when there is a change in the financial
position of the business. The change in financial
position may be of two kinds:
1. Quantitative change:
This changes the
total value of assets and liabilities of a business
concern. Suppose, machinery of $50,000 is destroyed.
This reduces the total value of the assets of the
business. As a result, the financial position
changes and hence it is a transaction.
2. Qualitative change:
increase or decrease in the different elements of
assets or liabilities, but the value of total assets
and total liabilities remains unchanged. Suppose, we
buy machinery worth $50,000. This results in
exchange of properties - cash $50,000 goes out of
our possession and at the same time machinery of an
equal value comes into our possession. This does not
change the total value of our assets, but this
causes a qualitative change in our financial
position, hence it is a transaction.