Financial statements and business transactions

Transaction - the flow of economic resources, or rights to the resources, from one accounting entity to another.

- provides a means for measuring activity.

- the idea of an exchange underlies the concept of a transaction.

Some type of documentary evidence, such as a receipt or a signed authorization, arises at the time of a transaction.

Types of Transactions:

Future Transactions.

1. 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.

2. 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.

3. 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.

1. By measuring and communicating informa­tion on current transactions, accounting reveals the current state of the entity's activities.

2. 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.

Past Transactions.

1. Measurement and communication of past trans­actions provide a description of the entity's activities over a period of time.

2. 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.

Classification of Transactions:

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

1. 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.

The idea of an exchange, or a trading between two parties, under­lies the concept of a transaction. While the description is satisfactory for most general purposes, for accounting purposes a transaction is de­fined in several special ways. One way, an external exchange transac­tion, refers to the exchange between the company and someone out­side of the company.

1. 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.

The concept of an accrued (external) transaction refers to those activities which result in a continuous transfer of services from one company to another.

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

1. 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.

To expand on the concept of internal transactions note that it does not refer to an exchange with another company; it refers to the transfer of resources from one internal area to another internal area. Typically, internal transfer transactions refer to the transfer of resources from one department to another, or of responsibility for them from one per­son to another.

1. 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.

Internal accrued transactions represent the continuous transfer of resources from one area to another within the company. They are rec­ognized periodically, generally at the end of each month, in the manu­ally maintained accounting record.

Financial statements provide information about:

1. an entity’s economic resources, obligations and equity

2. changes in an entity’s economic resources, obligations and equity

3. the economic performance of the entity

There are such types of financial statements:

1. a balance sheet,

2. an income statement

3. a cash flow statement and a profit&loss account statement

The objective of financial statements is to provide information about the financial position (balance sheet), performance (income statement) and changes in financial position (cash flow statement) of an entity.

Annual balance sheet (sheet or statement of financial position) – is a document reviling what a company owns (assets) and what it owes (liabilities/obligations)

The profit&loss account and the cash flow statement – show how much money a company has spent or received during a year.

Transparency - the principle of creating an environment where information on existing conditions, decisions and actions is made accessible, visible and understandable to all market participants.

Disclosure - the process and methodology of providing the information and making policy decisions known through timely dissemination and openness.

Accountability refers to the need for market participantsto justify their actions and policies and accept responsibility for their decisions and results.

Transparency is necessary for the concept of accountability to take hold amongst the 3 major groups of market participants:

1. borrowers and lenders

2. issuers and investors

3. national authorities and international financial institutions.