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Question 2Q

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 127

Short Answer

Do the following events represent business transactions?

Explain your answer in each case

  1. A computer is purchased on account.
  2. A customer returns merchandise and is given credit on account.
  3. A prospective employee is interviewed
  4. The owner of the business withdraws cash from the business for personal use.
  5. Merchandise is ordered for delivery next month.

Option (a), (b), (d), and (e) are business transactions involving monetary value and double-entry effect on accounting.

Option (c) is not a business transaction.

See the step by step solution

Step by Step Solution

Meaning of Business Transaction

Business Transactions are transactions that involve a certain sum of money or monetary terms of financial value supported by a financial instrument or document with the effect of double entry in books of accounts.

(a) A Computer is purchased on account.

It is a business transaction since a fixed asset computer is purchased on account, creating a credit purchase.

Purchase A/C Dr

To Creditors A/C

(Being computer purchased on account)

(b) A customer returns merchandise and is given credit on account.

Merchandise refers to goods returned, which is “Purchase returns” on goods purchased on credit earlier. So, it is a business transaction since it involves double-entry of accounting and a certain sum of monetary terms.

Creditors A/C Dr

To Purchase Returns A/C

(Being customer returns goods and is given credit)

(c) A prospective employee is interviewed.

This is not a business transaction because

  • It does not contain monetary value to the transaction
  • It is an agreement between employee and employer & not a transaction
  • It is just an interview process involving oral or written communication.

(d) The owner of the business withdraws cash from the business for personal use.

The cash used is for personal purposes only, but that cash is withdrawn from business for personal use, which means its “Drawings.” So, it’s a business transaction, and it must be accounted for in books as,

Drawings A/C Dr

To Cash A/C

(Being cash withdrawn from business for personal use)

(e) Merchandise is ordered for delivery next month.

Merchandise refers to any products for sale or buy. Any business would order goods for resale or utilize raw material to produce the final product for sale. In any of the case, the goods ordered are considered as “Inventory” and is debited. Cash or Creditors account is credited depending on purchase terms.

It is a business transaction since it involves the monetary value of goods purchased.

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