What Is an Accounting Event?
An accounting event is a transaction that is recognized in the financial statements of an accounting entity. A company must record in its accounting records any economic event that impacts the company's finances. Examples of accounting events include such things as recording the depreciation of an asset, the payment of dividends to investors, the purchase of materials from a supplier, and the sale of goods to a customer.
Events such as natural disasters may be recorded as accounting events if they damage a company's property and other assets because the damage can be assigned a monetary value.
Understanding an Accounting Event
An accounting event is any business event that impacts the account balances of a company's financial statements. The recording of these events must follow the accounting equation, which specifies that assets must equal liabilities plus shareholders' equity. The sale of a good, for example, reduces inventory and increases accounts receivable. Because it affects profits, it also has an impact on shareholders' equity.
Similarly, depreciation expenses lower asset values and reduce net income and retained earnings. They thus reduce shareholders' equity.
Accounting events are only those events that can be measurable in monetary terms. Events such as natural disasters may be recorded as accounting events if they damage a company's property and other assets because the damage can be assigned a monetary value. Other events, such as the signing of a contract, may not affect the financial statements and therefore are not recorded as accounting events.
- An accounting event is a transaction that an accounting entity reports in its financial statements.
- Examples of an accounting event include the sale of goods, the purchase of raw materials, asset depreciation, and dividend payments to investors.
- Companies categorize accounting events as either internal or external events.
- The timing of when a company records an accounting event can vary depending on whether it uses the accrual accounting method or the cash accounting method.
Types of Accounting Events
An external accounting event is when a company engages in a transaction with an outside party or there is a change in the company's finances due to an external cause. For example, if a company purchases from a supplier the raw materials needed for the manufacturing of its goods, this would be categorized as an external event. When a company receives payment from a customer, this would also be an external event that it would need to record in its financial statements.
An internal event involves other changes that need to be reflected in the accounting entity's records. These may include the "purchase" of goods such as supplies from one department by another department within the company. The recording of depreciation expenses is another type of internal accounting event.
Recording Accounting Events
A company reports accounting events in its financial statements. Depending on the transaction, the company may report the event in its balance sheet under assets and liabilities or in its income statement under revenues and expenses.
The timing of when a company records a transaction can vary depending on the accounting method the company uses. If a company uses the accrual accounting method, it records its financial transactions when they are incurred regardless of whether there has been a cash transfer or not.
If a company uses the cash accounting method, it records its financial transactions when it actually receives or spends money. Most businesses use the accrual accounting method, with the exception of small businesses that might favor the relative simplicity of the cash accounting method.