The 2nd chapter of our Accounting learning course is “Transaction”. In this article, we’ll learn the 30 most important transaction questions and their answers.
You will be able to prepare for the accounting course very well if you carefully read each question and its answers.
You can read the first chapter of our accounting learning course here if you missed it.
By reading this post, you will be able to quickly prepare for any competitive tests, such as school and college exams, vivas, and job interviews.
So let’s get started.
Transaction Questions and Answers
The 30 most important transaction questions and answers are as follows:
Question 01: What is an event?
Answer: In the general sense, an event is a process or a part of a process that occurs at a specific time and location. So, an event is seen as one of the separate things that happen in the flow of human life.
For example, going to college every day, shopping, playing football, passing exams, attending birthday parties, and so on.
That is, any change in a person’s personal, family, social, or financial situation is an event.
But from the point of view of accounting, the events are considered a little differently.
An event is a one-time action in the continuous flow of work of a person or organization that can be measured in terms of money and has the potential to change the person’s or organization’s financial situation.
So it turns out that accounting only considers financial events as events.
Question 02: What are the important features of events?
Answer: The important features of events are as follows:
- Events are usually short-term, but some events can be long-term.
- Each event is unique and self-contained, but there are some events that are related to other events but not dependent.
- Each event can have financial or humanitarian or both types of value.
- There are some events that don’t usually happen in order to make money.
- Each event has a specific purpose.
- Events can be self-serving or selfless.
- The event ends with the achievement of the specific purpose for which it took place.
Question 03: What is Financial Event?
Answer: A financial event is an action that takes place at a particular time that has a financial value, can be measured in terms of money, and changes the financial condition of a person or organization.
For example, the purchase of land for $50,000, payment of $1000 for purchasing a jewelry set for the wife, sale of old furniture for $600, payment of $1000 to the employee as a salary, etc.
Businesses record all these financial events in a scientific way.
Question 04: What is a non-financial event?
Answer: A non-financial event is an action that takes place at a particular time that cannot be measured in terms of money and that does not immediately change the financial condition of the person or organization.
For example, JK International ordered XYZ International to provide 100 kg of sugar at $5 per kg. It is a non-financial event because it can be measured in terms of money, but it doesn’t change the person’s or organization’s financial situation right away.
Similarly, hiring an employee with a monthly salary of $800, getting a bridge contract, the death of a skilled manager in the organization, etc. are non-financial events.
Question 05: What is a transaction?
Answer: A transaction is a most important and widely used term in accounting. The word “transaction” means “exchange” or “acceptance” and “giving.”
In general, a transaction is an event that changes an organization’s assets, liabilities, and ownership and can be measured in terms of money. The accounting system only uses a scientific double-entry system to record financial transactions.
A transaction occurs when an individual’s or organization’s financial situation changes immediately as a result of the exchange of money, goods, or services that can be measured in terms of money.
And when this transaction changes the assets, liabilities, and ownership of a business or non-business organization, then it is called a business transaction or financial transaction of that organization.
For example, the purchase of furniture for the office for $20,000, purchase of goods for $10,000, payment of $5,000 for salary, payment of $ 3,000 for the office electricity bill, etc.
Question 06: What are the important features of business transactions?
Answer: The 7 important features of a business transaction are as follows:
- A transaction must be quantifiable in terms of money to be considered a transaction.
- Any event that causes a firm’s financial situation to change will be treated as a transaction.
- There must be two parties in any transaction. In other words, one party will receive a benefit and the other will ensure that the same benefits are provided.
- Each transaction is distinct from the others and operates on its own.
- Transactions may be seen or unseen.
- The term “historical transactions” refers to financial transactions that occurred in the past. Transactions are often used to describe events that may occur in the future. Any event that could change how the business is doing financially will also be counted as a transaction.
- Each transaction has an immediate effect on the accounting equation.
Question 07: Why is a transaction called self-sufficient and unique?
Answer: One transaction may be related to one or more other transactions, but each transaction will be self-sufficient and unique.
For example, “A” purchased a product worth $5000 on credit from “B” and paid for it a month later. Although there is a relationship between the two events, they are separate, that is, self-sufficient and distinct.
So these two events can be considered and recorded as two business transactions. That is why the transaction is said to be self-sufficient and unique.
Question 08: What is the classification of transactions?
Answer: The classification of the transaction is as follows:
Based on payment price:
- Cash Transaction
- Credit Transaction
Based on the scope of the occurrence of transactions:
- External Transactions
- Internal Transactions
Based on visibility:
- Visible or Real Transaction
- Invisible Transaction
Based on utility:
- Capital Transaction
- Revenue Transaction
Based on the objectiveness of people or organizations:
- Business Transactions
- Non-Business Transactions
- Personal Transactions
Question 09: What is a cash transaction?
Answer: When cash or checks are paid or received immediately for the purchase or sale of goods or services, it is referred to as a “cash transaction.”
For example, ABC purchased goods from TMC International for $10,000 in cash, sold goods to AB Brothers for $12,000 in cash, paid employees $4,000 as salary, received a check from Marko for $3000, paid telephone bills for $500, and so on.
Question 10: What is a credit transaction?
Answer: In many cases, the value of the purchase or sale of goods or the exchange of services is not immediately received or paid but is due or payable at a future date. In the case of payment, such conditional transactions are called credit transactions.
A credit transaction occurs when no payment is made in cash or by check as soon as the transaction is completed.
The number of such transactions is higher in modern business.
For example, goods purchased from MN Traders on credit for $1000, goods sold to Mark International on credit for $4000, an outstanding salary of $500, outstanding office rent of $3000, and so on.
Question 11: What is a non-cash transaction?
Answer: Non-cash transactions are those that do not involve cash or that are receivable or payable in cash at a future date.
Non-cash transactions are any transactions in which there is no cash involved.
For example, the depreciation of all fixed assets.
Question 12: What is an external transaction?
Answer: External transactions occur when one organization sells or exchanges goods or services with another.
For example, the sale of goods worth $5,000 to JK Traders in cash, the purchase of goods worth $6,000 from Moon International, the payment of $2,000 to employees, etc. are external transactions.
Question 13: What is an internal transaction?
Answer: Internal or inter-transactions are transactions that take place within the organization.
Internal or inter-transactions are financial transactions or events that don’t involve a third party, like a person or another business. All these transactions are usually non-cash transactions.
For example, depreciation of assets. This is an inter-transaction as the value decreases due to the use of assets (such as furniture, machinery, etc.).
Question 14: What is a visible or real transaction?
Answer: Visible transactions are those that can be touched, that is, those that are visible and capturable.
When two people trade goods or services for money or cash in front of each other, this is called an actual or visible transaction.
For example, sales of goods of $6,000, paid office rent of $2,000, paid salary and wages of $1,000, etc. are visible or real transactions.
Question 15: What is an invisible transaction?
Answer: Invisible transactions are those that can’t be touched, that is, they can’t be seen or captured.
Invisible transactions happen when a person or organization’s finances change because of a hidden or indirect event or action that can be measured in terms of money.
For example, depreciation of assets. Due to the use of the property or for other reasons (e.g., technical changes), its value decreases, which is not directly visible. Similarly, invisible transactions like share discounts, goodwill valuations, etc.
Question 16: What is a business transaction?
Answer: All transactions that take place for business purposes are called “business transactions.”
Numerous transactions take place in different commercial or business organizations. Directly or indirectly, the main purpose of all these transactions is to make a profit.
For example, the construction of a factory for $2,000,000, the purchase of goods for $20,000, the payment of a salary of $4,000, etc. are business transactions.
Question 17: What is a non-business transaction?
Answer: Non-business transactions are those that are done by groups that don’t want to make money and only want to help the public.
There are many organizations where the main purpose of organizing a transaction is to provide services. Not all of these organizations are run for profit. All these organizations are non-profit organizations.
For example, donations to charities, schools, colleges, hospitals, etc.
Question 18: What is a personal transaction?
Answer: People carry out many transactions in their personal and family lives. For example, if you shop for a living, rent a house, buy a car, or use money in a variety of social situations.
However, some of the personal transactions are again for the purpose of making a profit. For example, renting a house to another person, giving a loan at a certain interest rate, etc.
Question 19: What is a capital-and-revenue nature transaction?
Answer:
Capital Nature Transaction:
Transactions that have long-term results are called capital nature transactions. For more than one year, the usefulness of capital-nature transactions has existed.
For example, the purchase of furniture, the purchase of equipment, etc.
Revenue-nature transaction:
Transactions that have short-term results are called revenue nature transactions. The utility of the revenue nature transaction ends within a financial year.
For example, house rent, salary, telephone bill, etc.
Question 20: What are the five most important differences between an event and a transaction?
Answer: The five most important differences between an event and a transaction are as follows:
- Every action that takes place in human life is called an event. On the other hand, the events that change the financial condition of a business are called transactions.
- One event may or may not be related to another event and on the other hand, each transaction is unique and self-contained.
- The scope of the event is extremely wide while the scope of the transaction is limited.
- No party is required for the event to take place on the other hand two parties are required for the transaction to take place.
- It is not necessary to have authentic documents for the event but on the other hand, it is necessary to have authentic documents for the transaction.
Question 21: Why are all events not transactions?
Answer: The reasons given for not calling all events a transaction are as follows:
- An event is when something happens. Events can be both financial and non-financial. Events that do not change the economic condition of a business are simply called events.
- Only financially related events are called transactions. All other events are called events only.
- Each transaction is unique and self-contained. Events that are not unique and self-contained cannot be called transactions.
- If goods or services are not exchanged through an event, they cannot be called a transaction.
- Only those events through which the dual entity changes are considered a transaction.
Question 22: What is the quantitative or net change of a transaction?
Answer: If there is a quantitative change in the total value of assets and liabilities of the organization, it is called a quantitative change or net change.
For example, Marko brought a loan of $8,000. In this case, the business asset, i.e., cash, increased by $8,000. On the other hand, the liability, i.e., the loan amount, increased to $8,000.
Question 23: What is the qualitative or structural change of a transaction?
Answer: If a transaction causes only a structural change in one of the two aspects of the asset and the liability, it is called a qualitative or structural change.
For example, Purchase furniture for $1000. There was a decrease of $1,000 in cash and an increase of $1,000 in furniture. As a result, only the structure of assets has changed.
Question 24: Why are the historical and future events transactions?
Answer: Events that have happened in the past are called “historical events.” Historical events in most cases of transactions.
For example, paid a salary of $500, purchased a machine for $3,000, and so on.
Again, some events that may happen in the future are also called transactions. Future events that change the business’s financial condition must be considered a transaction.
For example, bad debt allowance, discount allowance, etc.
Because of this, historical and future events are transactions.
Question 25: What are the source documents of accounting?
Answer: The source documents for accounting are as follows:
Voucher: A Voucher is the documentary evidence of the trade activity that took place. Vouchers may be of two types: internal vouchers and external vouchers.
Internal vouchers are created by the business. External vouchers are created by third parties rather than by the business.
Journal Voucher: Journal vouchers are required for journaling.
Cash Voucher: A cash voucher is a piece of paper that proves a cash transaction took place.
Petty cash voucher: proof of petty expense payment. This is needed for the petty cash book.
Invoice: An invoice is a legal document that proves the purchase and sale of products. When a sales agent sells a product, he hands over a written document that contains all of the product’s specifications.
Debit Voucher: Debit vouchers can be used for a number of things, such as buying things and paying for different costs.
Credit Voucher: Credit vouchers can be used to both sell products and get money.
Cash Memo: At the time of a cash transaction, a cash memo is given. A cash memo is normally given to the buyer by the seller.
Debit Note: When purchased goods are returned to the seller due to poor quality or failure to meet the terms of the letter of order, the buyer prepares a note explaining the details, such as quantity, cost, and value, as well as the reasons for the return of the goods. This note is called a debit note.
Credit Note: When the seller receives goods returned by the buyer, he sends a letter to the buyer outlining the goods’ description, quantity, and value, as well as informing the buyer that the value of the goods returned has been credited to his account. This is called a Credit Note.
Question 26: What is the Dual Aspect of Transactions?
Answer: One of the features of a transaction is the dual aspect. According to the double-entry system, each transaction must have two parties. Because no transaction can take place through one party.
According to the rules of accounting, one party is debited and the other party is credited.
According to the dual aspect, two endpoints are involved in the transaction. The flow starts from one end and reaches the other end. The one who reaches the end gets it and is called a “debit,” while the end where the flow starts is referred to as “credit.”.
Therefore, in a double-entry accounting system, dual means the two endpoints of the flow of money or its equivalent.
For example, Mr. Y bought a piece of furniture for $500. Here the furniture came, so the “furniture account” was debited, and the cash was gone, so the “cash account” had to be credited. That is, duality exists in the transaction.
To summarize, the idea of the dual aspect is that a transaction requires two parties to debit and credit the same amount of money in order for it to take place.
Question 27: How to identify transactions?
Answer: The following examples explain which events are transactions and which are not:
In the business of Mr. Paul, the following events took place:
1. Mr. Paul started the business with $60,000.
2. Purchased goods with cash of $12,000.
3. Paid to vendor $6,000.
4. Placed an order for purchasing goods worth $9,000.
5. Made an expense for advertisement worth $1,000.
Whether these events are transactions or not explained with reason-
Solution:
No. 1
Whether Transaction or Not – Transaction
Explain with a reason: Since the introduction of cash as capital, there has been a financial change that involves two parties: the owner’s capital and the cash.
No. 2
Whether Transaction or Not – Transaction
Explain with a reason: The value of a product is measurable in terms of money. The purchase of goods is a business expense, whereas the payment has reduced the cash amount.
No. 3
Whether Transaction or Not – Transaction
Explain with a reason: Payment to the creditor has reduced the business’s liability as well as its cash, affecting its financial condition.
No. 4
Whether Transaction or Not – Not a Transaction
Explain with a reason: Just because you place an order for something doesn’t mean you’ll buy it. It is not a transaction because there has been no buying or selling of goods.
No. 5
Whether Transaction or Not – Transaction
Explain with a reason: The company has benefited from placing an advertisement, and the price paid for it has resulted in a financial change.
Question 28: What is the concept of an accounting equation?
Answer: The key to a double-entry system is to credit the organization for exactly the amount of money that will be debited for each transaction. That is, the total assets of the organization over a period of time will be equal to the owner’s equity and outside liabilities. The equation in which this mathematical formula is proved is called the accounting equation.
The accounting equation is discussed below:
Basic Accounting Equation: A=L+OE
Here,
A=Assets
L=Liabilities
OE= Owner’s Equity
Expanded Accounting Equation: A=L+C-D+R-E
Here,
A=Assets
L=Liabilities
C=Owner’s Capital
D=Owner’s Drawings
R=Revenues
E=Expenses
Asset: Asset here means the financial assets of the organization which are owned by the organization and used for profit. For example, cash, machines, furniture, etc.
Liability: Liability here will be the financial liability of the organization which the organization has to pay at a certain time, i.e., the liability will be the claim of the third party on the total assets of the organization.
Owner’s Equity: Owner’s equity is what exists if the third-party claim is excluded from the total assets of the organization. This is the owner’s claim on the total assets of the organization.
Revenue: Revenue is the inflow of assets that are generated through the sale of goods or services. This inflow increases the owner’s capital.
Expenditure: Expenditure that is spent for revenue. Expenses result in a decrease in assets or an increase in liabilities.
So it can be said that the mathematical formula by which the relationship between total assets, liabilities, and ownership of a business is expressed is called an accounting equation.
Question 29: What is the impact of transactions on the accounting equation?
Answer: The following examples explain the impact of transactions on the accounting equation:
1.Mr. Y started the business with $10,000
Impact: Both Assets (cash) and Equity (capital) increased
A=L+OE
10,000=0+10,000
2. Purchased furniture on credit $4,000
Impact: Both Assets (furniture) and Liabilities (creditors) Increased.
A=L+OE
4,000=4,000+0
3. Paid to creditors $2,000
Impact: Both Assets (cash) and Liabilities (creditors) decreased.
A=L+OE
-2,000=-2,000+0
4. Wages paid in cash $2,000
Impact: Both Assets (cash) and Equity (expense) decreased.
A=L+OE
-2,000=0-2,000
5. Business loan $6,000 paid off by the owner personally.
Impact: Liabilities (loan) decreased and Equity (capital) increased.
A=L+OE
0= -6,000+6,000
Question 30: What are the five changes in accounting equations for an event to be considered a transaction?
Answer: At least one of the following five changes must occur in the accounting equation for an event to be considered a transaction:
- If one asset increases, another asset decreases.
- If the total assets increase, the total liability or owner’s capital will increase.
- If total assets decrease, total liabilities or owner’s capital decrease.
- If the owner’s capital increases, the total liability will decrease.
- If the owner’s capital is reduced, the total liability will increase.
I hope that by the end of this post, you have a good understanding of the “Transaction” chapter.
You will gain a better understanding of the “Transaction” chapter if you read these 30 important accounting transaction questions and answers on a regular basis.
If you have any doubts or questions, don’t hesitate to contact us or leave a comment so that we can respond soon.
you can also read:
- 25 Important Account Questions and Answers [With PDF]
- 25 Important Double Entry System Questions and Answers [With PDF]
- 20 Important Accounting Cycle Questions and Answers [With PDF]
- 30 Important Journal Questions and Answers [With PDF]
- 30 Important Ledger Questions and Answers [With PDF]
- 30 Important Cash Book Questions and Answers [With PDF]
- 25 Important Trial Balance Questions and Answers [With PDF]
