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Types of Transactions in Accounting


Types of Transactions in Accounting

Transactions

In accounting, transactions (as a financial reporting reflection of transactions, events or conditions involving an entity operations and activities, within and with outside world) take many forms. Per se, different types of major classes of transactions are associated with different levels of inherent risk and require different levels of management supervision and involvement. For accounting purposes, and as applicable by auditors, the major classes of transactions are classified as: routine, nonroutine, and estimation.

Routine transactions

In accounting, a routine transaction represents is a transaction (see: transaction classes) reflecting recurring financial activities recorded in the books of account of an entity as conducted in the normal course of business. For example, routine transactions may be sales, purchases, cash receipts, cash disbursements, payroll, and the like.

Routine transactions relate to ordinary transactions, events and conditions, i.e., as part of normal day-to-day operations of an entity. These transactions are key in preparing an entity’s financial statements and providing systematic format of its business or activities. Routine transactions are usually recorded on the basis of different accounting concepts and principles including double entry system and accrual accounting.

Such transactions are processed through the so-called transaction system, i.e., a collection of routine transaction records that can be used in various business processes. Nonroutine transactions, on the other hand, typically include events that don’t take place on a regular basis. The transaction system entails that routine transactions are entered in special journals – being a simple venue to record the most frequently occurring transactions. For example, there are four types of special journals that are frequently used by merchandising businesses: cash receipts journals, sales journals, purchases journals, and cash payments journals.

Entities use special journals to record repetitive transactions that has an effect on the same set of accounts and by nature have a consistent description.

Nonroutine transactions

A nonroutine transaction is a type or class of transaction that occurs only on a time-to-time basis or periodically, but not as a routine. This involves activities and/ or events that take place only periodically such as taking physical inventory, calculating depreciation expense, and adjusting for foreign exchange translation effects.

Nonroutine transactions are characterized by the fact that the information involved are generally not part of the routine flow of transactions. In other words, this refers to transactions that are unusual, either due to size, nature and reason, and therefore do not occur frequently.

Nonroutine or unusual transactions include, but are not limited to, major property acquisitions (mergers, acquisitions, etc.), asset write-offs, losses due to natural disasters (force majeure), and new product implementation. When recording transactions that occur infrequently, an entity may not have sufficient and adequate experience to establish correct values. In which situation, auditors tend to assume the existence of a high inherent risk. Significant risk usually relates to nonroutine transactions which require special audit consideration.

For example, when an entity acquires a new subsidiary, the transaction and all related accounting treatment and financial reporting processes will be conducted as for any unusual, nonroutine transactions. Acquisition-related expenses arise and are considered nonroutine transaction costs. The same may apply to determining the allowance for doubtful accounts, though in certain cases such a process is more into an accounting estimate transaction. Other examples of nonroutine transactions may include issuance of bonds (debt securities) or additional shares.

Nonroutine transactions may increase the risk of material misstatement because of the great extent of management intervention required, including more reliance on manual data collection and processing. Due to their infrequent nature, such transactions may require complex calculations or unusual accounting principles not subject to effective internal controls.

Estimation transactions

An estimation transaction is a transaction class that involves management judgments or assumptions in establishing account balances in the absence of a precise means of measurement. An accounting estimate is the estimation used for measurement of monetary amounts is subject to the so-called estimation uncertainty, corresponding to inherent limitations in management’s judgment or data. This relates to items on financial statements that have no accurate quantification and are therefore figured out based on judgment and knowledge derived from experience and past performance.

These limitations lead to inherent subjectivity and variation in the measurement outcomes. Applying management’s judgment adds to complexity and subjectivity of the process of estimation, and the effects of such factors and other inherent risk factors on the measurement of monetary amounts would increase their susceptibility to misstatement.

The main examples of accounting estimate transactions include determining the allowance for doubtful accounts, establishing warranty reserves, and assessing assets for impairment. An accounting estimate transaction constitutes an accounting treatment whereby management makes an informed judgment or estimation about an uncertain event or condition. The process involves reviewing, analyzing, and evaluating relevant information that harbors substantial measurement uncertainty. The allowance for doubtful accounts, as an example, involves estimating the amount of accounts receivable (A/Rs) that are expected to be uncollectible.



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