Introduction to Recording Transactions
(Fundamental concepts for bookkeeping and accounting)
1. What Is a Transaction?
- Definition: Any economic event that changes the financial position of an entity and can be measured in monetary terms.
- Key characteristics
- Dual effect: Every transaction impacts at least two accounts (debit ↔ credit).
- Measurable: Must be expressed in a reliable currency amount.
- Documented: Supported by source documents (invoice, receipt, contract, etc.).
2. The Accounting Equation
[
\text{Assets} = \text{Liabilities} + \text{Owner’s Equity}
]
- Every transaction must keep this equation in balance.
- Impact examples
- Purchasing equipment for cash:
- Decrease Cash (Asset) → Credit
- Increase Equipment (Asset) → Debit
- Borrowing from a bank:
- Increase Cash (Asset) → Debit
- Increase Notes Payable (Liability) → Credit
3. The Double‑Entry System
| Step |
Action |
| 1 |
Identify the accounts affected. |
| 2 |
Determine which account(s) are debits and which are credits. |
| 3 |
Apply the rule: Debits = Credits for the transaction. |
| 4 |
Record the entry in the journal (chronological record). |
| 5 |
Post the amounts to the appropriate ledger accounts. |
- Debit (Dr.) – left side of an account; increases assets & expenses, decreases liabilities, equity, and revenue.
- Credit (Cr.) – right side of an account; increases liabilities, equity, revenue, decreases assets & expenses.
4. Source Documents
| Document |
Typical Transaction |
Information Captured |
| Invoice |
Sale on credit |
Date, parties, amount, terms |
| Receipt |
Cash purchase |
Date, amount, description |
| Purchase order |
Order of goods/services |
Quantity, price, supplier |
| Bank statement |
Deposits/withdrawals |
Date, amounts, balances |
| Payroll register |
Salary payments |
Employee, wages, deductions |
Always retain original documents for verification and audit trails.
5. Journals and Ledgers
5.1 General Journal
- Purpose: Primary book of entry; records every transaction chronologically.
- Format (simplified):
| Date |
Account Title & Ref. |
Debit |
Credit |
Explanation |
| 01‑Jan |
Cash |
5,000 |
|
Cash received from owner |
|
Owner’s Capital |
|
5,000 |
(Owner’s investment) |
5.2 Special Journals (optional)
- Sales Journal – credit sales.
- Purchases Journal – credit purchases.
- Cash Receipts Journal – cash inflows.
- Cash Disbursements Journal – cash outflows.
5.3 General Ledger
- Purpose: Consolidates all debits and credits by account.
- Structure: One T‑account per ledger account; running balance shows current value.
6. The Posting Process
- Locate the journal entry.
- Transfer each debit to the debit side of the corresponding ledger account.
- Transfer each credit to the credit side of its ledger account.
- Update the account balance.
- Cross‑reference with journal page