Definition: Events, also called business events or transactions, are occurrences that can be measured and change a business’ financial position. In other words, an event is a business transaction that affects the accounting equation and can be reasonably measured. Remember, it must be both of these. You must be able to measure the event and it must affect the accounting equation.
What Does Business Event Mean?
This means the business event must measurably change a combination of asset, liability, or equity accounts.
Most people think of events as transactions. A company transacts with a vendor to purchase inventory. The dollar amount of inventory is measurable and the transaction affects the cash and inventory asset accounts.
This is an example of an external event because it is between two different companies.
Internal events can also occur within a single company. Transferring goods from storage to the assembly plant is a good example. The raw materials in storage are transferred to the production floor where they turn into goods in process inventory. The asset accounts are affected and the change is measurable.
All events are recorded in the accounting system as a general journal entry. One account is debited while the other account is credited as per the double entry accounting method. In our inventory example, the inventory account would be debited while the cash account was credited.
Not all business happenings are considered events. For example, signing a production contract or lease agreement doesn’t usually change the accounting equation in any way. The business entered into an agreement but no accounts were actually changed. Also, some things can’t be reasonably measured. The a pending lawsuit that would negatively affect the company might not be able to be estimated. Thus, it’s not recorded in the financial statements or general ledger.
Only happenings that can be measured and affect the accounting equation are considered business events.