Analyzing and Recording Transactions

The first step in the accounting process is to analyze every transaction that affects the business. The accounting equation (Assets = Liabilities + Owner's Equity) must remain in balance after every transaction is recorded.

Under the double-entry bookkeeping system, the full value of each transaction is recorded on the debit side of one or more accounts and also on the credit side of one or more accounts. Therefore, the combined debit balance of all accounts always equals the combined credit balance of all accounts.

These transactions are initially recorded on source documents, such as invoices or checks. The accountant then analyzes each transaction and identifies what effect it has on the accounts. After making this determination, he enters the transactions in chronological order into a journal, a process called journalizing the transactions. Although many companies use specialized journals for certain transactions, all businesses use a general journal.

To record a journal entry, begin by entering the date of the transaction in the journal's date column. For convenience, include the year and month only at the top of each page and next to each month's first entry. In the next column, list each account affected by the transaction on a separate line, and enter a short description of the transaction immediately below the list of accounts. The accounts being debited always appear above the accounts being credited, which are indented slightly. The posting reference column remains blank until the journal entry is transferred to the accounts, a process called posting, at which time the account's number is placed in this column. Finally, enter the debit or credit amount for each account in the appropriate columns on the right side of the journal. Generally, one blank line separates each transaction.

After journalizing transactions, the next step is to post transactions to the accounts in the general ledger. Although T accounts provide a conceptual framework for understanding accounts, most businesses use a more informative and structured spreadsheet layout. A typical account includes date, explanation, and reference columns to the left of the debit column and a balance column to the right of the credit column. The reference column identifies the journal page containing the transaction. The balance column shows the account's balance after every transaction.