Transaction Questions and Answers [With PDF]
Every entry in your books starts with a transaction. If you can tell what counts as a transaction, and what does not, the rest of accounting becomes much easier. Here are 30 important questions on this chapter, answered in simple words with examples you can use in your exams.
This is Chapter 2 of our Accounting course. If you missed Chapter 1, start with Introduction to Accounting.
Events and Transactions
Q1. What is an event?
An event is anything that happens at a particular time and place, such as going to college, passing an exam or buying a shirt. In accounting, we are interested only in events that have a financial effect on a person or an organization.
Q2. What are the main features of events?
- Events happen at a specific time, and most are short-term.
- Each event has a purpose and ends when the purpose is achieved.
- Events may be related to other events, but each one is complete in itself.
- An event can have financial value, human value or both.
Q3. What is a financial event?
A financial event is an event that can be measured in money and changes the financial position of a person or business. Examples: buying land for 50,000, paying a salary of 1,000, or selling old furniture for 600.
Q4. What is a non-financial event?
A non-financial event does not change the financial position at the moment it happens, so it is not recorded. Examples: receiving an order for goods that have not been delivered, appointing an employee who has not yet worked, signing a contract before any work or payment, or the death of a skilled manager. They may affect the business later, but there is no entry until a real financial change takes place.
Q5. What is a transaction?
A transaction is a financial event that can be measured in money and changes the assets, liabilities or owner’s equity of a business. It usually involves an exchange of money, goods or services. Examples: buying office furniture for 20,000, paying 5,000 as salary, or paying a 3,000 electricity bill.
Q6. What are the important features of a business transaction?
- It can be measured in money.
- It changes the financial position of the business.
- It involves two sides: one side gives a benefit and the other receives it.
- It is supported by a source document, such as an invoice or voucher.
- Each transaction is separate and complete in itself.
- It may be visible (like a cash sale) or invisible (like depreciation).
- It affects the accounting equation, but the equation always stays balanced.
Q7. Why is a transaction called self-sufficient and unique?
Two transactions may be related, but each is recorded on its own. For example, A buys goods worth 5,000 on credit from B, and a month later pays for them. The purchase and the payment are linked, yet they are two separate transactions with separate entries.
Classification of Transactions
Q8. How are transactions classified?
| Basis | Types |
|---|---|
| Mode of payment | Cash and credit transactions |
| Scope | External and internal transactions |
| Visibility | Visible (real) and invisible transactions |
| Nature of benefit | Capital and revenue transactions |
| Purpose of the party | Business, non-business and personal transactions |
Q9. What is a cash transaction?
A transaction in which payment is made or received immediately, in cash or by cheque. Example: buying goods for 10,000 and paying cash on the spot.
Q10. What is a credit transaction?
A transaction in which payment is made or received at a later date. Example: buying goods worth 1,000 from MN Traders and agreeing to pay next month. Unpaid expenses such as outstanding rent or salary are also credit transactions.
Q11. What is a non-cash transaction?
A transaction that does not involve cash at the time it is recorded. The best example is depreciation of fixed assets, which reduces the value of an asset without any cash leaving the business.
Q12. What is an external transaction?
A transaction between the business and an outside party. Examples: selling goods to JK Traders for cash, buying goods from Moon International, or paying an employee’s salary.
Q13. What is an internal transaction?
A transaction that happens inside the business without involving an outside party. Depreciation is the usual example. These are normally non-cash transactions.
Q14. What is a visible (real) transaction?
A transaction in which goods, services or money actually pass between two parties and can be seen or proved. Examples: selling goods for 6,000, paying office rent of 2,000, or paying wages of 1,000.
Q15. What is an invisible transaction?
A transaction that changes the financial position without any direct exchange between two parties. Depreciation is the standard example: an asset loses value through use or age, but nobody pays or receives anything at that moment.
Q16. What is a business transaction?
A transaction done for the purpose of the business, directly or indirectly aiming at profit. Examples: building a factory, buying goods for resale or paying salaries.
Q17. What is a non-business transaction?
A transaction of an organization whose main aim is service, not profit, such as a school, hospital or charity. Examples: receiving donations or paying the fees of a school’s staff.
Q18. What is a personal transaction?
A transaction made by a person for personal or family needs, such as buying groceries, paying house rent or buying a car. Some personal transactions earn income, such as renting out a house or lending money on interest.
Q19. What are capital and revenue transactions?
| Point | Capital transaction | Revenue transaction |
|---|---|---|
| Benefit lasts | More than one year | Within one year |
| Examples | Buying furniture, machinery or a building | Rent, salary, telephone bill |
| Appears in | Balance sheet (as an asset) | Profit and loss account (as income or expense) |
Event vs Transaction
Q20. What are the differences between an event and a transaction?
| Event | Transaction |
|---|---|
| Any happening in life, financial or not | Only a financial event that changes the business’s position |
| Very wide scope | Narrow scope |
| May or may not involve two parties | Always involves two sides |
| Source document not needed | Source document needed |
| May be linked to other events | Recorded as a separate, complete item |
Q21. Why are all events not transactions?
Because only events that can be measured in money and that change assets, liabilities or equity are transactions. Events with no financial effect, such as receiving an order or hiring someone who has not started, are only events. Every transaction is an event, but not every event is a transaction.
Q22. What is a quantitative (net) change in a transaction?
It is a change in the total amount of assets and liabilities (or equity). Example: a business takes a loan of 8,000. Cash (an asset) rises by 8,000 and the loan (a liability) rises by 8,000, so both totals grow.
Q23. What is a qualitative (structural) change in a transaction?
It is a change in the form of the items without changing the totals. Example: buying furniture for 1,000 in cash reduces cash by 1,000 and increases furniture by 1,000, so the total assets stay the same.
Q24. Why are historical and future events treated as transactions?
Most transactions are historical, meaning they have already happened, such as paying a 500 salary or buying a 3,000 machine. Some future-related items must also be recorded because they affect the present financial position, for example a provision for bad debts or a provision for discount. They are estimates of expected losses and are adjusted in the books.
Source Documents and Dual Aspect
Q25. What are the source documents of accounting?
| Document | Purpose |
|---|---|
| Voucher | Written proof that a transaction took place (internal or external) |
| Cash voucher | Proof of a cash receipt or payment |
| Debit voucher | Used for payments and expenses |
| Credit voucher | Used for receipts and sales |
| Petty cash voucher | Proof of a small expense |
| Journal voucher | Supports non-cash journal entries |
| Invoice | Bill issued by the seller with goods, quantity and price |
| Cash memo | Receipt given to the buyer for a cash sale |
| Debit note | Sent by the buyer to the seller when goods are returned |
| Credit note | Sent by the seller to the buyer to confirm credit for returned goods |
Q26. What is the dual aspect of transactions?
Every transaction has two sides: one account receives a benefit and another gives it. The receiving side is debited and the giving side is credited, both for the same amount. Example: Mr. Y buys furniture for 500 in cash. Furniture comes in, so Furniture A/c is debited. Cash goes out, so Cash A/c is credited. This is the basis of the double entry system.
Identifying Transactions and the Accounting Equation
Q27. How do you identify whether an event is a transaction?
Ask three questions: Can it be measured in money? Does it change an asset, a liability or equity? Is there a source document? If the answer is yes, it is a transaction. Test it on Mr. Paul’s business:
| Event | Transaction? | Reason |
|---|---|---|
| Started business with 60,000 | Yes | Cash and capital both increase |
| Bought goods for 12,000 cash | Yes | Stock increases and cash decreases |
| Paid a supplier 6,000 | Yes | Cash and the liability both decrease |
| Placed an order for goods worth 9,000 | No | No goods received yet and no money paid |
| Paid 1,000 for advertising | Yes | Expense increases and cash decreases |
Q28. What is the accounting equation?
The accounting equation shows that what a business owns is financed by what it owes to outsiders and what it owes to the owner:
Assets = Liabilities + Owner’s Equity (A = L + OE)
The expanded form is A = L + Capital – Drawings + Revenue – Expenses.
- Assets: resources owned by the business, such as cash, stock and machinery.
- Liabilities: amounts the business must pay to outsiders.
- Owner’s equity: the owner’s claim on the assets after liabilities are deducted.
- Revenue: inflows from selling goods or services, which increase equity.
- Expenses: costs of earning revenue, which reduce equity.
Q29. What is the effect of transactions on the accounting equation?
| Transaction | Assets | Liabilities | Equity |
|---|---|---|---|
| 1. Mr. Y starts business with 10,000 | +10,000 | 0 | +10,000 |
| 2. Buys furniture on credit, 4,000 | +4,000 | +4,000 | 0 |
| 3. Pays creditors 2,000 | -2,000 | -2,000 | 0 |
| 4. Pays wages 2,000 in cash | -2,000 | 0 | -2,000 |
| 5. Owner pays a business loan of 6,000 from personal funds | 0 | -6,000 | +6,000 |
In every row the equation still balances: the change in assets equals the change in liabilities plus the change in equity.
Q30. What are the five possible changes in the accounting equation?
For an event to be a transaction, at least one of these five changes must happen:
- One asset increases and another asset decreases.
- Assets increase and liabilities increase.
- Assets increase and owner’s equity increases.
- Assets decrease and liabilities decrease, or assets decrease and owner’s equity decreases.
- One liability or equity item increases while another liability or equity item decreases.
Quick Revision Points
- A transaction is a financial event measurable in money that changes assets, liabilities or equity.
- Not every event is a transaction. An order or a hiring decision alone is not.
- Every transaction has two sides: debit the receiver, credit the giver.
- Equation: Assets = Liabilities + Owner’s Equity. It always balances.
- Capital items last more than a year. Revenue items last within a year.
Test your understanding with the chapter quiz below, then continue to Account.
