3. We suggest you allow limited time.

4. We were satisfied by the offer.

5. We made a considerable profit on that deal.

These examples are more difficult. You may need to change them much more:

3. We think you understood exactly what we meant.

4. These charges are normal/common.

5. We think we acted correctly.

XVII. Sometimes it can be difficult to know how to say things which we often write. Write down exactly how you would say these, including , as in the examples, any symbols which occur:

Open Mon-Fri 9am-5pm — Open from Monday

to Friday, from 9 till 5 They cost £ 1.55/lb — They cost one pound fifty five per pound

Write how you would say the symbols in:

1. 17.4 % of the population are left-handed.

2. We ordered 6 doz 2" screws.

3. 1 lb = 0,45 kg approx.

4. All quantities are guaranteed ± ½ %.

5. Interest of 12½ % is payable from June 1^st.

6. The goods are packed in cases 1.5x0.8x0.65 m. The capacity is thus approx 0.8 cu. m. per case.

7. Re your invoice No 765/14C.

8. We have received your letter of credit N 22331 for 26,205 D.M.

9. Tel (SDT Code 0273) 661881.

10. A rent of £ 8/sq ft is normal in the area.

11. The rate would be £ 28/delegate/day, VAT included.

12. Items marked * carry a 10% discount.

13. We can supply a ¾" size immediately. The ⁷/₁₆" are unfortu­nately currently out of stock.

14. The new metro can do 54 mpg at a steady 50 mph.

15. £ 1 = 10.19 Skr, $ 1.78 = £ 1.

16. 80

    Their turnover now exceeds £ 2,5 m.p.a.

UNIT 5

81

6 3-520

BUSINESS TRANSACTIONS AND FINANCIAL STATEMENTS

Text А BUSINESS TRANSACTIONS

Basic Terminology for Accounting Information

Money resources and economic or service resources are the assets of a company. Initially creditors and owners are the sources of the as­sets of a business. These sources of assets are known as the equities of a business. They represent claims upon the assets if the business is dissolved.

Expenses are the assets used up or spent to provide revenue. Reve­nue is the payment made by customers for the product or service pur­chased. Income is the excess of the assets received (revenue) over the assets used up to provide the revenue (expense); it is the net increase in assets. Income increases the owners' equity in the business because the owners' claim to assets is increased.

A distinct feature of traditional accounting information is that it relies heavily on a transfer or exchange between the business and out­siders and between areas within the company. Accountants tend to as­sume for recording purposes that an activity takes place when an ex­change occurs. These exchanges are known as transactions. In a sense, traditional accounting information is information on either past or fu­ture transactions.

Transactions

A transaction provides a means for measuring activity. By a trans­action is meant the flow of economic resources, or rights to the re­sources, from one accounting entity to another. Since substantially all business or economic activities culminate in an exchange rather than in consumption by the entity, a record of an entity's transactions will reveal its significant activities, for the idea of an exchange underlies the concept of a transaction. For example, if the DAB Company pur­chased land for $6,000 cash, the exchange of cash for land would rep­resent a transaction. If Department A of the DAB Company trans­ferred $1,000 of machinery to Department В of the same company, the flow of the machinery in exchange for relief from responsibility

for the machinery would represent an activity resulting in an internal transaction.

Normally, some type of documentary evidence, such as a receipt or a signed authorization, arises at the time of a transaction. When this documentary paper exists, it is evidence of the existence of the trans­action; with no documentary evidence, verification is more difficult. Nevertheless, if the significant activities are to be measured, the ac­counting process should provide a record of all transfers of rights ei­ther within the entity or between the entity and an outside group. That is, the concept of a transaction should reflect changes in the economic wealth of the entity, changes in the nature or form of the wealth, changes in responsibility for the wealth, and changes in rights to the wealth.

There are limitations to the transaction concept, for not all business activities are immediately reflected in a transaction. Specifically, changes in the market price of economic resources often occur with­out regard to business activities aimed at a future transaction. Simi­larly, some business activities are directed toward objectives which cannot be related to a specific future transaction, such as the produc­tion of a product having an unknown future sales (transaction) price. In an effort to overcome limitations such as these, the accounting dis­cipline has stretched the concept of a transaction to include the con­cept of an accrued transaction which, as we shall see, includes meas­urements of changes in wealth and rights to wealth prior to the time the exchange transaction occurs.

Types of Transactions

The procedures of accounting largely represent means for meas­uring and communicating information on transactions. The develop­ment of these procedures involves problems of measuring and com­municating information on three types of transactions. It is important to distinguish them, for different measurement and communication methods are appropriate for each type.

82

Future Transactions. 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. 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. The distinction between accounting for possible future transactions and planned future transactions may best be explained by an illustra­tion. If Company A is considering buying either machine X or ma­chine Y at some future date, a decision will have to be made between the two possible future transactions. Accounting for possible future transactions may involve cost and revenue estimates for each proposal to indicate which machine should be acquired. 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. By measuring and communicating informa­tion on current transactions, accounting reveals the current state of the entity's activities. 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. For example, if a company had planned to produce 100 units of a product with $10,000 of raw material, disclosure that the company is currently using $200 of raw material per unit would enable manage­ment to correct the error which is causing the excessive use of raw materials.

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

Transactions may be classified in a number of ways. Possibly the most useful classification for accounting purposes is the following:

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.

2. 83

   6*3-520

   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.

2. Internal transactions involve the activities within the company. These activities also are of 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.

2. 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.

Transactions and Accounting Data Collection Procedures

The study of accounting procedures is largely the study of means for collecting data on transactions. A record of data on past, present, and future transactions provides a means for describing business ac­tivities. Since business activities are directed toward the objectives of acquiring and using economic resources, traditional accounting proce­dures normally measure transactions in terms of the monetary worth of the resources involved in the transactions. They provide for the classification of the transactions in such a way as to reveal the nature of the business activity involved. In communicating measured infor­mation to others, accounting procedures represent means for disclos­ing transactions in terms of business efforts and business accom­plishments and the resulting economic resources and rights in the entity. While the following discussion is primarily a description of historically conventional methods for collecting data on external ex­change transactions, it is applicable to all types of transactions.

Transactions and Business Activity

The validity of the assumption that business activities of all types ultimately result in transactions is most important to the double-entry recording process. If the «lag» between a business activity (e.g., making shoes for a customer) and the transaction (delivery of the shoes to the customer) were substantial, the criticism could be made that the accounting recording process is inadequate and should aban­don the transaction concept. However, there is no reason to think that the lag between a business activity and the resulting transaction is so great that the transaction concept cannot be used. Undoubtedly, as electronic data processing develops, it will be possible by the accrual process to eliminate much of the lag when it does exist.

To prevent the development of a «lag» between a business activity and a transaction, accountants have defined a transaction in a special way: they have adopted the concept of an accrued transaction and use it to record business activity prior to the date the actual transaction oc-curs. There is apparently no limit to the use of the accrual concept; there are, however, certain conventions governing its use under the manual recording double-entry system. The concept of an accrued transaction as it is used for double-entry recording can best be ex­plained by discussion of the four types of transactions.

External Exchange Transactions

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.

External Accrued Transactions

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