Types of Transactions.

Date: 2015-10-07; view: 465.

The procedures of accounting largely represent means for measuring and communicating information on transac­tions. The development of these procedures involves problems of mea­suring and communicating information on three types of transactions. It is important to distinguish them, for different measurement and com­munication methods are appropriate for each type.

Future Transactions. By measuring and communicating information on possible future transactions, accounting reveals those activities which appear to be the most desirable for the entity to carry out in the fu­ture. By measuring and communicating information on planned future transactions, accounting reveals those actions which will have to be taken at appropriate times to carry out the plans most effectively. The distinction between accounting for possible future transactions and planned future transactions may best be explained by an illustration. If Company A is considering buying either machine X or machine Y at some future date, a decision will have to be made between the two possible future transactions. Accounting for possible future transactions may involve cost and revenue estimates for each proposal to indicate which machine should be acquired. Once a decision is made, a planned future transaction exists. It is, however, normally only one of several planned future transactions. Accounting for these planned future transactions involves relating them to each other so that a coordinated company plan results. Normally, they are grouped together in an operating budget to indicate when each planned transaction should take place.

Current Transactions. By measuring and communicating information on current transactions, accounting reveals the current state of the en­tity's activities. When these current transactions are compared with the budgeted or planned transactions, the information disclosed will enable management to take actions which will bring current activities in line with planned activities and thus control the activities of the entity. For example, if a company had planned to produce 100 units of a product with $10,000 of raw material, disclosure that the company is currently using $200 of raw material per unit would enable management to correct the error which is causing the excessive use of raw materials.

Past Transactions. Measurement and communication of past transac­tions provide a description of the entity's activities over a period of time. Systematic study and analysis of these descriptions afford insights into the nature of an entity's operations which enable governments to establish tax collection methods, owners to control general managerial direction of the entity, and creditors to evaluate managerial performance over a period of time and in varying situations.