Question

Explain the term ‘transaction’.

Answer 1

A business transaction refers to an economic activity that alters the financial position of the business. It causes changes in assets, liabilities, and capital. Transactions can be of two kinds; cash and credit. In a cash transaction, money is paid or received immediately, while in a credit transaction, payment is postponed to a future date.

The main characteristics of a transaction are:

1. It must be an economic activity. Activities of a social nature (e.g., Ram inviting Mohan to dinner) are not transactions.
2. It requires an exchange or transfer of value.
3. It results in a change in the financial position of the business. 
4. The change should be measurable in monetary terms. For instance, the retirement of a senior manager is significant, but it is not a transaction since it cannot be expressed in money.