The Recording Process: Meaning of

Transaction, Its Features and Types

In accounting, the recording process is fundamental. It ensures that every business activity is
systematically documented to provide accurate financial information. At the heart of this process
lies the concept of a transaction, which triggers the need for recording in the books of accounts.
Let’s explore what a transaction means, its features, and the different types.

Importance in the Recording Process

Understanding the meaning, features, and types of transactions is crucial because:

 It ensures proper classification and recording in the books of accounts.

 It helps prepare accurate financial statements.
 It maintains compliance with accounting standards and audits.
 It provides a clear picture of the business’s financial health for decision-making.

Meaning of Transaction
A transaction refers to any business activity or event that involves the exchange of money or
money’s worth between two or more parties and has a financial impact on the business.
Transactions form the basis of accounting because they result in a change in the financial position
of an organization.

For example:
 Purchasing inventory for cash
 Selling goods on credit
 Paying salaries
 Receiving bank interest
If an event does not have a measurable monetary effect, it is not considered a transaction for
accounting purposes.

Features of a Transaction
The key features of a transaction are:

1. Monetary Value:
A transaction must be measurable in monetary terms. Qualitative aspects like employee
morale are not recorded.
2. Exchange of Value:
It typically involves the transfer or exchange of goods, services, or money.
 3. Dual Aspect:
Every transaction affects at least two accounts, maintaining the accounting equation
(Assets = Liabilities + Equity).
4. Impact on Financial Position:
Transactions bring about a change in the financial state of a business, impacting assets,
liabilities, income, or expenses.
5. Evidence or Documentation:
Transactions should be supported by source documents like invoices, receipts, or
contracts to serve as proof.

Types of Transactions
Transactions can be classified in several ways. The main types include:

1. Cash and Credit Transactions

 Cash Transactions:
When payment is made or received immediately in cash or through bank transfer (treated
as cash equivalent).
Example: Buying goods and paying instantly.

 Buying stationery for the office and paying Tk.500 in cash.

→ Recorded immediately as an expense and cash outflow.
 A customer purchases goods and pays Tk.1,000 at the counter.
→ Recorded as sales revenue and cash inflow.

 Credit Transactions:
When payment is deferred to a future date.
Example: Selling goods on credit to a customer who will pay later.

 Purchasing raw materials worth Tk.20,000 on credit from a supplier, to be

paid after 30 days.
→ Recorded as inventory increase and accounts payable.
 Selling goods worth Tk.5,000 to a retailer who will pay next month.
→ Recorded as sales and accounts receivable.

2. Internal and External Transactions

 External Transactions (Business Transactions):

These involve an exchange between the business and external parties.
Example: Paying rent to a landlord.

 Paying monthly rent of Tk.15,000 to the landlord.

→ Payment to an outside party; recorded as rent expense.
 Receiving interest of Tk.2,000 from the bank.
→ Income received from an external party.
  Internal Transactions:
Transactions that occur within the business and do not involve an outside party but still
impact the financial position.
Example: Depreciation charged on machinery.

 Charging depreciation of Tk.10,000 on machinery at year-end.

→ No external exchange but impacts the value of assets and expenses.
 Writing off bad debts of Tk.1,500 after realizing a customer cannot pay.
→ Internal adjustment affecting income.

3. Revenue and Capital Transactions

 Revenue Transactions:
Relate to the day-to-day operations of the business and affect profit or loss.
Example: Sale of goods, payment of wages.

 Paying monthly salaries of Tk.50,000 to employees.

→ Recurring, day-to-day operational expense.
 Receiving Tk.30,000 from customers for regular sales.
→ Operating income.

 Capital Transactions:
Involve long-term assets or liabilities and affect the financial position but not directly the
operational profit.
Example: Purchase of a building.

 Purchasing new equipment worth Tk.2 lakh.

→ Increases fixed assets, not treated as day-to-day expense.
 Owner invests an additional Tk.5 lakh into the business.
→ Increases owner’s equity (capital).

🚫 Examples of activities not treated as transactions

Here are some examples of activities that are not transactions because they do not involve
measurable monetary value or do not cause any financial change in the books:

Hiring an employee:
 Appointing a new manager or sales staff.
 No money exchanged at this point; only a contract or offer letter.
 Salary payments later will be a transaction.

Signing a contract:
 Agreeing to supply goods next month.
 Until goods are delivered or payment is made, no accounting transaction occurs.
 It’s only a future commitment.
Placing an order:
 Ordering furniture for office use.
 Until the furniture is delivered (or invoice is received), no transaction is recorded.

Announcing a bonus:
 Company announces that it will pay a Diwali bonus.
 Unless it becomes a legal liability (declared and due), it’s not a transaction.

Holding a meeting:
 Conducting board meetings, staff meetings, or training sessions.
 These are managerial activities, with no direct financial impact recorded.

Appreciation or criticism of staff

 Praising a sales team for meeting targets.
 No monetary value; hence, not recorded in books.

Estimating market trends:

 Analyzing competitors or discussing marketing plans.
 No immediate monetary value is involved.

Why they’re not transactions?

Because transactions must:

 Be measurable in monetary terms.

 Cause a change in financial position (affecting assets, liabilities, equity, income, or
expenses).
📊 Comparison Table: Transaction vs Non-Transaction
Activities
Basis Transaction Activities Non-Transaction Activities

Business events measurable in Business activities or events that do not

Definition monetary terms and recorded in the involve monetary value or do not change the
books of accounts. financial position.

Monetary Yes, always impacts assets, liabilities,

No direct monetary effect on the books.
Impact equity, income or expenses.

Recorded in No, only noted for operational purposes, not

Yes, journal entries are made.
Accounts recorded in accounts.

- Paying rent Tk.15,000- Selling goods - Hiring a new employee- Holding a team
Tk.10,000- Buying machinery meeting- Placing an order (before delivery)-
Examples
Tk.2,00,000- Receiving bank interest Announcing a future bonus- Conducting
Tk.2,000 market research

Supported by source documents

Proof Required Usually no accounting documents created.
(invoices, receipts, contracts).

Effect on
Alters Balance Sheet or Profit & Loss
Financial No effect on financial statements.
A/c.
Statements

Quick summary:

 Transactions = measurable in money + impacts financial position + recorded.

 Non-Transactions = managerial / operational events with no immediate monetary effect,
so not recorded.

Conclusion
The recording process in accounting begins with identifying transactions. A clear understanding
of what constitutes a transaction, its essential features, and various types lays the foundation for
systematic accounting. This process ensures that every financial event is properly recorded,
ultimately leading to reliable financial statements and informed business decisions.