Every business encounters several incidents and occurrences each day. Some may be minor with limited impact whereas some maybe major with more far reaching impact for the business. Whether these occurrences find place in the books of accounts or not primarily depends on whether or not they have monetary impact on the business.
This article looks at meaning of and differences between two different types of occurrences based on their impact on the business – event and transaction.
Definitions and explanations
An event is an incident or occurrence that concerns the business or impacts the business dealings. An event that has measurable monetary impact qualifies as a transaction which has been elaborated on in the subsequent paragraph. Events that do not qualify as transactions are those that although impact the business do not have immediate monetary impact on its accounts. Events (other than transactions) are thus not recorded in the books of accounts of the company.
Events, although do not have immediate monetary impact, it is important for management to keep track of them as they may lead to future monetary impact for the business.
An example of an event can be death of a senior key management personnel or a large scale employee strike. These events do not have immediate monetary impact and thus do find any place in the books of accounts. However, they have more long lasting impact on the business – employee strike may negatively impact production and sales.
A transaction is a business event that has impact, direct or indirect on finances of the business. An event becomes a transaction if it involves exchange of values or resources and can be measured in monetary terms. It is thus recorded in its books of accounts. A transaction is recorded by a journal entry in the books of accounts.
A plethora of events can qualify as transactions such as purchase or sale of goods, payment for expenses etc.
A transaction need not involve actual exchange of cash but must have monetary impact to qualify as a transaction. For example, credit sales of goods and services do not involve cash exchange however they result in recognition of income and creation of assets i.e., accounts receivable or debtors, thus it has monetary impact and qualifies as a transaction. Similarly, credit purchases of goods and services do not involve cash payments but result in recognition of liabilities i.e., accounts payable or creditors.
Difference between event and transaction:
The difference between event and transaction has been given below:
- Events are all incidents or occurrences that relate to the business or have an impact on the business of the entity.
- Transactions are those events which have immediate and measurable monetary impact on the books of accounts of the entity.
- Events other than transactions do not involve exchange of value or resources.
- Transactions involve exchange of value of resources.
- Events other than transactions are not immediately measurable in monetary value.
- Transactions are measurable in monetary value.
4. Impact on a business
- Events have an impact on business, but events other than transactions do not have an immediate monetary impact. Their impact could be more far reaching and seen in the future.
- Transactions have immediate monetary impact on the finances of a business.
5. Disclosure in books of accounts
- Events, other than transactions are not recorded through the books of accounts. They however may be disclosed in management report or annual report or audit report as it may have monetary impact for the business in the future.
- Transactions are recorded through journal entries in the books of accounts.
- Events can either qualify as transactions or not qualify depending on the impact that they have.
- All transactions are events.
- The scope of events is wide as it encompasses all occurrences that concern the business.
- The scope of transactions is narrower as it includes only those events that have immediate and measurable monetary impact.
- Examples of events include – death of key persons, labor union strikes etc.
- Examples of transactions include business dealings such as purchase and sale of goods and services.
Event versus transaction – tabular comparison
A tabular comparison of event and transaction is given below:
|All incidents or occurrences that pertain to and that may have an effect on the business||Events which are recorded in books of accounts of a business as they have quantifiable impact on its finances|
|Exchange of resources or value|
|Events (other than transactions) do not involve such exchange||Yes involved|
|Events (other than transactions) are not measurable in monetary terms||Measurable in monetary terms|
|Immediate monetary impact on business|
|For events (other than transactions) – No. May have impact in the future||Yes|
|Disclosure in books of accounts|
|Not recorded in books. Can be disclosed in other reports which accompany financial statements||Recorded in books of accounts|
|All events are not transactions||All transactions are events|
|Events, other than transactions include death or retirement of important management persons, labor strikes etc||Purchase and sale of goods or services|
Conclusion – event vs transaction
Understanding the bifurcation of events and transactions is important for an accountant who has to appropriately record transactions in the books of accounts. So while transactions may appear more significant as they have immediate impact, other events too may have significant monetary impact in the future. Hence such events must also be tracked and appropriately disclosed in reports of an entity.