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Identifying and Analyzing Business Transactions

This document discusses identifying and analyzing business transactions for accounting purposes. It defines a business transaction as an activity or event that can be measured monetarily and affects a business's financial position or operations. To qualify as a recordable transaction, an event must (1) involve the business entity, (2) have a monetary value, and (3) have a dual/two-fold effect on accounting elements like assets and liabilities. Transactions are also classified as exchange transactions like purchases/sales or non-exchange events like equipment depreciation. All transactions must be supported by source documents like receipts, invoices, or checks to be properly recorded.

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Mardy Dahuyag
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133 views

Identifying and Analyzing Business Transactions

This document discusses identifying and analyzing business transactions for accounting purposes. It defines a business transaction as an activity or event that can be measured monetarily and affects a business's financial position or operations. To qualify as a recordable transaction, an event must (1) involve the business entity, (2) have a monetary value, and (3) have a dual/two-fold effect on accounting elements like assets and liabilities. Transactions are also classified as exchange transactions like purchases/sales or non-exchange events like equipment depreciation. All transactions must be supported by source documents like receipts, invoices, or checks to be properly recorded.

Uploaded by

Mardy Dahuyag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 4

Identifying and Analyzing Business Transactions

An accounting system must record all business transactions to ensure complete and reliable information
when the financial statements are prepared.
What is a business transaction? A business transaction is an activity or event that can be measured in
terms of money and which affects the financial position or operations of the business entity.
A business transaction has an effect on any of the accounting elements – assets, liabilities, capital,
income, and expense.
Transactions may be classified as exchange and non-exchange. Exchange transactions involve physical
exchange such as purchasing, selling, collection of receivables, and payment of accounts.
Non-exchange transactions are events that do not involve physical exchanges but where changes in
monetary values are determinable, e.g. wear and tear of equipment, fire loss, typhoon loss, etc.
To qualify as an accountable/recordable business transaction, the activity or event must:
1. Be a transaction involving the business entity
The separate entity concept or accounting entity assumption clearly establishes a distinction between
transactions of the business and those of its owner/s.
If Mr. Bright, owner of Bright Productions, buys a car for personal use using his own money, it will not be
reflected in the books of the company. Why? Because it does not have anything to do with the business.
Now if the company purchases a delivery truck, then that would be a business transaction of the
company.
If Mr. Grim invests $20,000 into the company, would that be recorded in the books of the business? Ask
this: Does it have anything to do with the company? Yes. Then, that would be a recordable business
transaction.
In any case, always remember that a business is treated as an individual entity, separate and distinct
from its owners.
2. Be of a financial character (in a certain amount of money)
Transactions must involve monetary values, meaning a certain amount of money must be assigned to
the elements or accounts affected.
For example, Bright Productions renders video coverage services and expects to collect $10,000 after 10
days. In this case, it's explicit. The income and receivable can be measured reliably at the $10,000.
Fire, typhoon and other losses may be estimated and assigned with monetary values.
The mere request (order) of a customer is not a recordable business transaction. There should be an
actual sale or performance of service first to give the company a right over the income or revenue.
3. Have a dual or "two-fold" effect on the accounting elements
Every transaction has a dual or two-fold effect. For every value received, there is a value given; or for
every debit, there is a credit. This is the concept of double-entry accounting.
For example, Bright Productions purchased tables and chairs for $6,000. The company received tables
and chairs thereby increasing its assets (increase in Office Equipment). In return, the company paid cash;
thus, there is an equal decrease in assets (decrease in Cash).

4. Be supported by a source document


As part of good accounting and internal control practice, business transactions must be supported by
source documents. The source documents serve as bases in recording transactions in the journal.
Examples of source documents are: Official Receipt issued whenever cash is received, Sales Invoice for
sales transactions, Cash Voucher for payment in cash, Statement of Account from suppliers, Vendor's
Invoice, Promissory Notes, Check, Charge Invoice, Collection receipts, Cash Sales Invoice, Delivery
Receipts, Inspection and Acceptance Report, Request and Issuance Slip, Payroll, Petty Cash Voucher
and other business documents.
The first step in the accounting process is actually to prepare the source document and determine the
effects of the business transaction to the accounts of the company. After which, the accountant records
the transaction through a journal entry.

Examples of source documents are: Official Receipt issued whenever cash is received, Sales Invoice for
sales transactions, Cash Voucher for payment in cash, Statement of Account from suppliers, Vendor's
Invoice, Promissory Notes, Check, Charge Invoice, Collection receipts, Cash Sales Invoice, Delivery
Receipts, Inspection and Acceptance Report, Request and Issuance Slip, Payroll, Petty Cash Voucher
and other business documents

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