In accounting cycle, we find pretty often words like “transactions and other events and circumstances affecting an entity” But what is that suppose to mean? Especially in here, what is the meaning of events in one accounting cycle?
The phrase “transaction and other events and circumstances affecting an entity” is used to to describe the sources or causes of changes in an entity’s assets, liabilities and equity.
There are two types of events: (1) External events which involve interaction between and entity and its environment, such as a transaction with another entity, a change in the price of a good or service that an entity buys or sells, a flood or earthquake, or an improvement in technology by a competitor.
(2) Internal events occur within an entity, such as using building and machinery in its operation or transferring or consuming raw materials in production processes.
Many events include elements of both external and internal events. For example, acquiring the services of employees or others involves exchange transaction, which are external events; using those services (labor), often simultaneously with their acquisition, is part of production, which is a series of internal events.
Events may be initiated and controlled by an entity, such as the purchase of merchandise or the use of a machine, or they may be partly or wholly beyond the control of an entity and its management, such as an interest rate change, an act of theft or vandalism, or the imposition of taxes.