Not all events that occur in a business on a daily basis constitute financial transactions that are recorded. Give an example of a business transaction that would not be recorded and explain why it would not need to be recorded.
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SOLUTION to ACC 240: Fundamentals of Accounting- Topic 3 DQ 1.
Hello class,
One example of a common business event that does not necessarily constitute a financial transaction requiring an accounting record is routine maintenance of fixed assets like office equipment. While maintaining assets is important for operations, routine repairs, and service checks, it may not alter the financial position of the firm and thus would not demand journal entries. According to accounting principles, for an activity to qualify as a transaction there must be a measurable economic impact involving an exchange of value that affects the financial statements (Raicevic, 2021). However, simple upkeep that preserves the existing usefulness of an asset does not alter its recorded book value, original cost, or estimated useful life. As long as such maintenance is treated as an operational expense for the period without elongating an asset or changing its service potential, then recording a journal entry would be unnecessary paperwork.
Additionally, this example aligns with the accounting concept of conservatism, which according to Anagnostopoulou et al. (2021) specifies that potential gains are never anticipated, while losses are provisioned for in advance if reasonably estimable. Thus, by not setting up maintenance as a transaction, it avoids overstating assets before deriving corresponding future benefits. I believe this approach is prudent and prevents inflating accounting numbers prematurely to portray a stronger position than reality. Moreover, periodic maintenance also tends to be recurring minor costs that are factored into depreciation expense allocation rather than itemized individually. This smoothens reported earnings rather than create fluctuations from low-dollar transactions.
In my opinion, routine asset preservation deemed too immaterial and frequent to measure precisely would fall outside the domain of accounting transactions. This is because record-keeping aims to objectively reflect economic impacts as they occur to inform investment judgments while omitting operational tasks that do not alter the quality or lifespan of company resources. This conforms with the materiality concept fundamental to producing a practical, useful depiction of financials.
References
Anagnostopoulou, S. C., Tsekrekos, A. E., & Voulgaris, G. (2021). Accounting conservatism and corporate social responsibility. The British Accounting Review, 53(4), 100942. https://doi.org/10.1016/j.bar.2020.100942
Raičević, J. (2021). Accounting policies in the function of quality assessment of financial statements. Economic Themes, 59(3), 357-373.