Accountancy · Ch 1 — Introduction to Accounting
Economic Events
Economic Events
Economic Events: The Foundation of Accounting
Accounting does not record every happening in a business. It only records economic events — happenings that have a financial consequence for the organisation and can be measured in terms of money.
An economic event is not a single action. It is a bundle of related transactions. For example, buying a machine is an economic event. But that one event includes several transactions: purchasing the machine, paying for its transport, preparing the site for installation, and spending on trial runs. Accounting identifies and records this entire bunch of transactions together because they all relate to the same event.
For a happening to be an economic event, it must satisfy two conditions: (1) it must be of consequence to the business, and (2) it must be measurable in monetary terms.
External Events
When an economic event involves a transaction between the business and an outsider (a person or entity outside the organisation), it is called an external event. These are the most common transactions recorded in accounting.
Examples of external events:
- Sale of goods to customers
- Rendering services to clients (e.g., by ABC Limited)
- Purchase of materials from suppliers
- Payment of monthly rent to the landlord
In each case, the business deals with someone outside — a customer, a supplier, a landlord. The accounting treatment for these is straightforward: one account (the outsider) is debited or credited, and the corresponding account (cash, sales, purchases, rent) is affected on the other side.
Internal Events
An internal event occurs entirely within the business, between its own departments or wings. No outsider is involved. Yet these events are still economic events because they have a monetary value and affect the business's financial position.
Examples of internal events:
- Supply of raw material by the stores department to the manufacturing department
- Payment of wages to employees …