Business transactions are the business records that document the financial transactions of a business; such as invoices, sales receipts, and bank deposits. How these are maintained is critical to the business as it provides proof of the companys financial position and provides a means for auditing. Auditing financial transactions has always been an important function of accounting, but due to fraud and other schemes, the importance of traceability and accuracy has become crucial. As a result of unethical practices having significant impact on shareholders, stakeholders, and employees, Sarbanes Oxley was implemented in the US as a way to implement financial transparency with the hopes of at least reducing accounting fraud.

The recording of business transactions follow basic accounting standards and is based on the source documents of financial transactions that occur within the business. These transactions will fall under one of three accounting classifications, or records (not to be confused with the documented transactions, that are also referred to as records); an Asset, Liability, or Equity. Each of these is considered an account. An account is a fluid record that continuously changes throughout time as financial transactions occur.

 

Accounting Equation


Assets = Liabilities + Equity

***!! Assets will ALWAYS equal Liabilities plus Equity; this is the accounting equation.


What is an Account?


There are 3 categories in the accounting equation and each contains accounts. These accounts provide the recording of business transactions in detail, over a period of time.

 

Assets


Assets are resources that contribute to the benefit of the business, either now or sometime in the future. The table below identifies basic types of Asset accounts many business's use:
Account Name Account Summary/Explanation
Cash Includes all money the business possesses; to include bank balances and checks
Accounts Receivable This is money a customer will pay for goods or services purchased. i.e. Your company sold a box of widgets to Company z, if they did not pay for all of the box, then what they owe your company will hit the Accounts Receivable account.
Notes Receivable Referred to as Promissory Note (a loan in layman's terms). This is a written promise (by a customer) to pay an amount of money with interest by a certain date.
Prepaid Expense An expense that is paid in advance. An example would be prepaid rent, or prepaid insurance.
Equipment, Furniture, and Fixtures These are typically broken into separate accounts and it is the cost associated with each category.
Building The cost of a structure, such as an office building or warehouse.
Land The cost of land that is used by a business for operations.

 

Liabilities


Liabilities are debts that the business will have. This is moeny the business owes to another company, for example the electric bill. The following table reflects four basic Liability accounts:

Account Name Account Summary/Explanation
Accounts Payable This is all money the company owes for goods or services it purchased. These are future payments that must be made and involves a future payment using cash.
Notes Payable Referred to as Promissory Note (a loan in layman's terms). This is a written promise (by the company) to pay an amount of money with interest by a certain date. This is a debt the company owes.
Accrued Liability This is an amount the company owes, but has not paid. An example fo this would be Rent Payable or Salaries Payable.
Unearned Revenue This type of transaction occurs when a company receives money from a customer, but they have not yet provided the good or service; they have not delivered the product yet.

 

Equity


Stockholder's claim of the business assets is referred to as Equity, or Stockholder's Equity. The following are examples of accounts that fall under Equity Accounts:

Account Name Account Summary/Explanation
Common Stock This is the net contributions of stockholders in a business. Contributions increase equity.
Dividends This is a distribution of cash or other types of assets that go to the stockholders. Distributions reduce equity.
Revenues When a company has earnings from delivery (note: not just selling) goods or a service to a customer these transactions are recorded here. These Revenues (earnings) increase equity.
Expenses This is the cost of selling a service or good. Examples of an expense are wages or utilities expenses. Expenses decrease equity.


Based on these fundamentals, a company will next develop a chart of accounts; a structure for how they will keep track of business transactions. The chart of accounts is the structure that assists the accountant (or individuals in an accounting department) with where to place the transactions. It should be noted, often in larger organizations there are individuals (or teams) that are responsible for specific areas within the chart of accounts. For example, one team member may be specifically responsible for updating the general ledger for accounts payable, while another is responsible for maintaining accounts receivable. Within these particular accounts there will be debits and credits pending the flow of the transactions. It is important to note that within each functional area (i.e. accounts payable) there are usually several sub-accounts within the category to account for the different types of expenses.