Transactions and Business Activity

The validity of the assumption that business activities of all types ultimately result in transactions is most important to the double-entry recording process. If the "lag" between a business activity (e.g., making shoes for a customer) and the transaction (delivery of the shoes to the customer) were substantial, the criticism could be made that the accounting recording process is inadequate and should abandon the transaction concept. However, there is no reason to think that the lag between a business activity and the resulting transaction is so great that the transaction concept cannot be used.

Undoubtedly, as electronic data processing develops, it will be possible by the accrual process to eliminate much of the lag when it does exist.

To prevent the development of a "lag" between a business activity and a transaction, accountants have defined a transaction in a special way: they have adopted the concept of an accrued transaction and use it to record business activity prior to the date the actual transaction occurs. There is apparently no limit to the use of the accrual concept; there are, however, certain conventions governing its use under the man­ual recording double-entry system. The concept of an accrued transaction as it is used for double-entry recording can best be explained by discussion of the four types of transactions.

External Exchange Transactions

The idea of an exchange, or a trading between two parties, underlies the concept of a transaction. While the description is satisfactory for most general purposes, for accounting purposes a transaction is defined in several special ways. One way, an external exchange transaction, refers to the exchange between the company and someone outside of the company.

External Accrued Transactions

The concept of an accrued (external) transaction, refers to those activities which result in a continuous transfer of services from one company to another.

Internal Transfer Transactions

To expand on the concept of internal transactions, note that it does not refer to an exchange with an­other company; it refers to the transfer of resources from one internal area to another internal area. Typically, internal transfer transactions refer to the transfer of resources from one department to another, or of responsibility for them from one person to another.

Internal Accrued Transactions

Internal accrued transactions represent the con­tinuous transfer of resources from one area to another within the com­pany. They are recognized periodically, generally at the end of each month,in the manually maintained accounting record.

Summary

Relying on the observation that business activities ultimately result in an exchange of some type, the accounting discipline for recording data on business activity uses the concept of a transaction to indicate when an activity has occurred.

As this chapter illustrates, a systematic recording of transactions by different recording processes provides a description of busi­ness activities. The transactions concept may also be used to describe future or planned activities and current or standard activities.

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Date: 2016-01-14; view: 630