Classification of Transactions.

Date: 2015-10-07; view: 433.

Transactions may be classified in a num­ber of ways. Possibly the most useful classification for accounting pur­poses is the following:

1. External transactions involve activities between an entity and some­one outside the entity. They are of two main types:

a. Exchange transactions, wherein there is an exchange of economic resources or rights between the company or other entity and someone outside the entity, such as the sale of merchandise to a customer for cash.

b. Accrued transactions, wherein there is continuous gradual trans­fer or receipt of economic rights or services by the company to or from an outside party with the understanding that payment for the services will be made later. An example is the con­tinuous transfer of electricity to a customer by an electric utility company, for which payment is made at the end of the month.

2. Internal transactions involve the activities within the company. These activities also are of two main types:

a. Transfer transactions, wherein there is a transfer of economic resources or rights from one area of the company to another in exchange for relief from responsibility for the resources or rights. The transfer of material from the storeroom to the factory is an example.

b. Accrued transactions, wherein the transfer of economic resources or rights is a continuous process. An example is the gradual using up of a machine over a period of time to make a product. The daily wearing out of the machine would be an accrued transaction.