transactions approach

The "transactions approach" to accounting focuses on recognizing income and expenses based on actual transactions that have occurred with external parties. This means income is recorded when work is performed for a customer, goods are delivered, or the customer is billed, rather than when cash is received. Similarly, expenses are recognized when resources are consumed to generate revenue. This method is fundamental to accrual accounting, which is used by most companies, especially publicly traded ones, and is a key component of Generally Accepted Accounting Principles (GAAP).12

In contrast, cash basis accounting tracks income and expenses solely based on the movement of cash in and out of the business. While simpler, it may not provide as clear a picture of a company's financial health as the accrual method, which accounts for earned revenue and incurred expenses regardless of immediate cash flow. The law of transactions in Islamic jurisprudence, known as muʿāmalāt, also governs interpersonal dealings, with principles like sale, hire, gift, and loan forming its basis. It notably includes the prohibition of usury (ribā) and speculative transactions.13