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Business Transactions

 

Basic Terminology for Accounting Information.

Money resources and economic or service resources are the assets of a company. Initially creditors and owners are the sources of the assets of a business. These sources of assets are known as the equities of a business. They represent claims upon the assets if the business is dissolved.

Expenses are the assets used up or spent to provide revenue. Reve­nue is the payment made by customers for the product or service purchased. Income is the excess of the assets received (revenue) over the assets used up to provide the revenue (ex­pense); it is the net increase in assets. Income increases the owners' equity in the business because the owners' claim to assets is increased.

A distinct feature of traditional accounting information is that it relies heavily on a transfer or exchange between the business and outsiders and between areas within the company. Accountants tend to assume for recording purposes that an activity takes place when an exchange occurs. These exchanges are known as transactions. In a sense, tradi­tional accounting information is information on either past or future transactions.

Transactions

A transaction provides a means for measuring activity. By a transac­tion is meant the flow of economic resources, or rights to the resources, from one accounting entity to another. Since substantially all business or economic activities culminate in an exchange rather than in consumption by the entity, a record of an entity's transactions will reveal its significant activities, for the idea of an exchange underlies the concept of a transac­tion. For example, if the DAB Company purchased land for $6,000 cash, the exchange of cash for land would represent a transaction. If Department A of the DAB Company transferred $1,000 of machinery to Department B of the same company, the flow of the machinery in exchange for relief from responsibility for the machinery would represent an activity resulting in an internal transaction.

Normally, some type of documentary evidence, such as a receipt or a signed authorization, arises at the time of a transaction. When this documentary paper exists, it is evidence of the existence of the transac­tion; with no documentary evidence, verification is more difficult. Nev­ertheless, if the significant activities are to be measured, the accounting process should provide a record of all transfers of rights either within the entity or between the entity and an outside group. That is, the concept of a transaction should reflect changes in the economic wealth of the entity, changes in the nature or form of the wealth, changes in responsibility for the wealth, and changes in rights to the wealth.

There are limitations to the transaction concept, for not all business activities are immediately reflected in a transaction. Specifically, changes in the market price of economic resources often occur without regard to business activities aimed at a future transaction. Similarly, some business activities are directed toward objectives which cannot be related to a specific future transaction, such as the production of a product having an unknown future sales (transaction) price. In an effort to overcome limitations such as these, the accounting discipline has stretched the concept of a transaction to include the concept of an accrued transaction which, as we shall see, includes measurements of changes in wealth and rights to wealth prior to the time the exchange transaction occurs.




Date: 2016-01-14; view: 670


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