Difference between event and transaction

The world of accounting can be a confusing place, which is why many businesses employ professionally qualified accountants to prepare their accounts and handle bookkeeping, as well as a host of other issues connected with running a business. This relieves you of the burden, allowing you to devote more time to running your business.

Even so, it's good to keep up to speed with what's happening and to have an understanding of the basics. Some of the terms may be unfamiliar, or their meanings unclear.

This is often the case with the terms transaction and event in relation to the accounting process. These terms are used frequently, but there's a chance that you're not 100% certain as to the difference between the two.

Here's a quick guide that will help you have a better understanding and learn the difference between the terms event and transaction.

What Is Meant By Event In Accounting?

A business event is any activity that changes the financial position of a business entity and is shown in the financial reports. This includes all financial transactions but also refers to any business activity that has a measurable effect on the business overall: the transaction causes a financial change. However, not all business happenings can be measured, such as signing contracts or agreements, as they don't have a direct and measurable monetary impact on the financial reports.

To put it in simple terms, all business transactions are events, but not all events are transactions.

Let's break that down a little more to get a clearer picture.

Transactions

There are several different types of business transactions (also referred to as accounting transactions as they must be recorded in the books of accounts), all of which affect the financial status and financial statements of the company.

Obviously, we are talking here about financial transactions, which involves exchange of goods or services of monetary value between two parties. Here are some examples:

Credit transactions

A cash transaction

Purchase of fixed or moveable assets

Purchase of materials

Borrowing money or paying off borrowed funds from a creditor

Receipt of cash by sending an invoice

Payment of cash to a supplier from a sent invoice

Basically, it is any deliberate acts performed by business entities that generate income or incur expenses. All the transactions are recorded when they take place.

Events

We already know that all transactions are business events and that only those events that affect the financial position are recorded. But what else counts as an accounting event?

It's best to think of events as the final outcome of any business activity that affects the account balances. This includes transactions, but only in a narrow sense. Events, in the wider sense of the term, are the results of those transactions. All transactions are measurable in monetary terms, whereas some events may have no monetary impact and won't need to appear on the financial statements.

Accounting events can be separated into two categories: internal events, and external events.

External Events

An external event could be a business transaction between two parties, for example, when one company transacts with another. Any payments in or out of the company as a result of a purchase or sale with an outside organisation is an external event.

Internal Events

An internal event could be something like the 'purchase' of goods between one department and another within the company, such as supplying raw material to a manufacturing area. This type of accounting event is recorded in the books of accounts as it is measurable in monetary terms.

Another good example of an internal event is the payment of employees wages through the payroll system, as this does not involve any outside agencies.

Conclusion

By now, you should have a fairly good idea as to the main difference between transaction and event, which may help you to understand the accounting process a little better.

In summary, the main point to take away is that every transaction is an event, as it can be measured in monetary terms and must be recorded in the books of accounts. However, some events are the results of those transactions, and other types of events have no impact on the financial position of the company. To make it even clearer, events happen all the time, to everyone, including businesses. If you want to know whether an event needs to be recorded in the accounts, here's a simple rule:

To be classed a transaction, which means it has to be recorded, an event must be financial. Any event that isn't financial in nature does not qualify as a transaction.