Transactions

Written by Fmi.Online Friday November 11, 2022
An accounting transaction, also called a business event, is any exchange of economic consideration that can be reasonably measured and affects the firm’s financial position. In other words, transactions are events that change the accounting equation during a period. If assets, liabilities, or equity are changed or affected, chances are there is a transaction of some kind.

Explanation :

Any business event that can’t be measured is not considered a transaction because we don’t record events based on pure estimates. Some type of substantial measurability needs to exist in order to consider it a transaction. For example, natural disasters that destroy large amounts of equipment and adjustments to the fair value of some assets are recorded as transactions because they can be reasonably measured and affect the accounting equation. Signing of business contracts, on the other hand, don’t change the accounting equation, so they are not usually recorded as a transaction.

In a nutshell :

  • A transaction involves a monetary exchange for a good or service.
  • Accrual accounting recognizes a transaction immediately after it is finalized, regardless of when payment is received or made.
  • By contrast, cash accounting, used mostly by smaller businesses, records a transaction only when money is received or paid out.
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