Accounting Events and Transactions
The term accounting event refers to a change in an item that should be reflected in the company’s financial statements. Accounting events can be internal or external and usually involve a change in assets, liabilities, revenues, expenses or owner’s equity.
An accounting event usually involves a transaction that is measurable, relevant and reliable. Events that meet these conditions are then reported in the company’s financial statements; including the balance sheet (assets, liabilities) and the income statement (revenues, expenses).
Accounting events are divided into two broad categories:
- External Events: involves a change between the business and its external environment. Examples include increases in the price of raw materials, products or services provided to the business; as well as natural disasters such as a flood that affects a supplier.
- Internal Events: involves a change within the business, such as the consumption of raw materials in the manufacture of a product.
A transaction is an event that involves the exchange of value between two entities; that is to say, each entity receives and sacrifices value. For example, the business can purchase raw materials from a supplier. Transactions can also happen in one direction; value is provided to another entity without receiving value in return. For example, when a company pays its shareholders dividends, it provides something of value to those shareholders, but does not receive anything in return.