Economic Events

The first objective of any accounting system is to identify the economic events that can be expressed in financial terms by the system.

Economic Event – is any event that directly affects the financial position of the company. In other words, this means any business transaction or financial affair of the company.

Financial Position – comprises assets, liabilities and owner’s equity. 

Accounting Principles and Financial Reporting Standards – determine which events should be recorded, when the events should be recorded, and the amount at which they should be measured.

Economic Events can be classified as either external events or internal events.

External Events – involve an exchange between the company and a separate economic entity. Meaning the company receives something in exchange for something else. Examples :  Purchasing of materials for cash. Paying salaries to employees.

Internal Events – directly affect the financial position of the company but don’t involve exchange of transaction with another entity.   Examples: Depreciation of Machinery.  Use of supplies.