Financial Transactions in Accounting

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

Till here in the course of Fundamental of Accounting and Bookkeeping we have seen what accounting is. What is the meaning of accounting and its definition? We also saw various terminologies of it, and saw what are the things in that. Then we learned the various accounting concepts. Okay. In today’s topic we will learn about the starting point of accounting. You might want to start writing an account. Then what are the different ways or the various starting points of that.

Like here on the screen, you can see, what is a transaction? If we talk about transaction, as what is a transaction. In simple words, it is an agreement between two or more than two people. This agreement has expired. Here one word that has a great significance, that is an executed agreement, that means that this agreement has expired, between two people. It can be more than two people, but for an agreement, you need at least two individuals. Now what this agreement could be? It is a give and take of either goods or services or some financial assets. Here, if we talk about financial assets, then it can be some machinery, or a computer that we bought. That will be considered as a financial asset. I took a cheque from someone, or gave a cheque to someone, then also it would be considered in financial assets. Although, in return it should have some money in return. In a nutshell, a transaction is an executed agreement between two or more parties, for exchanges, that is give and take of the goods and services. In return there would be money associated with it. That would be called a transaction.

You might have heard that a long time ago when there was no money. When the currency was not invented, then at that time barter system was used. What was the barter system? Imagine I am a trader of wheat, and you are the trader of rice. Generally in the old times, what used to happen was, I gave you 5 kg wheat and you gave me 2 kg rice back. That was a give and take, this was known as the barter system. That would not be considered a financial transaction. This would be just an exchange. Why? Because it does not involve a monetary amount, I gave you 5 kg wheat and you gave me 2 kg rice. So, there would not be a bookkeeping for this, there cannot be a recording for this. Because you guys know that for every transaction, there should be a monetary value for it to be recorded.

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Let's take an example here. You need a minimum of two parties, for what? For an agreement. Okay. To execute any agreement you need at least 2 or more than two parties. Here you can see an example of a buyer and a seller. One would be selling and one would be buying. Those are two individuals. It can be B2B. One is a manufacturer and one is a seller. Okay. Then B2C, I am a seller or a retailer and I will be selling to my end customers, then this would be B2C, business to customer. The first one was B2B, in which one business was selling to another business, like a manufacturer selling to a retailer. Then the retailer would be selling to an end client. Okay. This would be B2B and then B2C. Are you getting me? Then there is giver and taker. There was no buyer and there was no seller. There were two customers who got in contact with each other and exchanged the products. This would be known as C2C, not any of the individuals in this is a business owner, this is between customer to customer. Both of them are the end users, and both exchanged some items.

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Then the next thing is customer and vendor. When I will be doing a business, then I will be taking the materials from many different people and also I will be supplying to many different peoples, wholesale, or retail. This would be customer and vendor relations. Then there is a government and business entity. Which kind of transaction is this? You all might know what the government does. When we do a lot of business, there is a lot of tax involved in it. Different tax elements like indirect tax and direct tax. You might have learned this, that there are two different kinds of tax. Direct tax and indirect tax. Indirect tax is usually collected by the state government and direct tax, like income tax is usually collected by the central government. So, whenever you will be doing a business, when your business is functioning then you will have to make some transactions with the government. Okay.

Now, when we pay tax to the government, then, what are we? We are payers, and the government is the collector. So what kind of relationship is developed here? Payee and collection. We are the payee and they are the collectors. Right.

In this case also, there are two parties and they both had agreement. Like, yes, at the end of the month, you will be filing a GST and you will be paying the liabilities to us, that is the GST, that is money. Here, there are two parties and two agreements. Money got involved. Then this is called a transaction. Whenever I will be paying some money to the government, or if the government offers a rebate to me, or a subsidy is credited to my account. Then that will also be a relationship, or an agreement, between the government and the business entity.

So, these were the various terminologies or agreements or parties. That get involved in the day to day business, for the business transaction. Okay.

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Then, after that. Should I be recording every transaction for the bookkeeping? That will be a massive books of accounts. I am saying books of account. We will talk about it later, as to what is a books of accounts. But before that. Should I be recording every transaction? Like suppose the government has announced that, anyone who is doing the business today, because of the covid situation, these businesses have been severely impacted. So we, the government, will be depositing 25k in the accounts of all the business. So should I record at that time itself? No! Right now it is just an announcement. This transaction has not been executed as of now. What did I tell you earlier? It should be an executed agreement. So, every transaction will not be recorded, as long as it is not executed, it is not completed, and if it doesn't have a monetary value. Okay. When an amount or a monetary value is involved in a transaction, then it would become a financial transaction and then only after that it would be recorded systematically in your books of account. Now in this books of accounts, this word came a second time. We have learned what accounting is, and also its various terminologies, and concepts. We also know now what a transaction is, and what a financial transaction is. We now know the bifurcation, as when the finance is involved and the agreement is complete then the transaction would be acknowledged. Now, we have complete clarity about the things that should be recorded and what should not be recorded.

But, where should this be recorded? Where should I record it? So, what is a books of account? You might have seen in the old movies that there used to be a bookkeeper, who constantly used to write in a book, which was usually of red colour. Even in today’s generation, if your father or grandfather is doing business then they might be writing something on a physical book. That this much was the sale, this was the purchase. Is it a books of accounts? We cannot say that it is a complete book of accounts, but yes it is a part of books of accounts. Now, let's understand the books of accounts. What is it? Before that, let's take a quick example of financial transactions. You all can see on the screen itself as, Mr A has given Mr B 50k rupees, Mr A has given a loan to Mr B, and these are two parties, who are involved in a transaction. Is the amount involved? Yes, 50k is involved. Is the agreement made as I will be giving him the loan at an interest of 10 percent. It is 10 percent annual simple interest. So how much money will he pay me? It will be 10 percent of 50k, that is 5k every year. He will be paying 5k as an interest every year. Now, is this a financial transaction? Let’s verify it, based on our two factors.

First one, is it an executed agreement? Yes, it is, the money has been given, the agreement has been executed. Does it involve two or more than two parties? Yes, it does involve two parties, Mr A and Mr B. Does this involve any financial amount? Yes, it does. In here, Mr A has given 50k, at an interest of 10 percent, that amounts to 5k per year. So, Mr B will annually pay 5k to Mr A until the loan is repaid completely.

So, here every factor of the definition, the checkpoints have ticked. Agreements have been executed, two parties are also involved, and the amount is also involved. Hence, this transaction will be a financial transaction, so you need to record it in the books of account. Okay.

If you have any queries and comments….

In the next session, we will be learning about what are the books of account? Is the red book itself a books of account? We will also be learning about various terminologies of books of account in the next session.

Until then, Thank You.