Prior to recording a business transaction there should be documentation to substantiate the entry. A document that provides evidence for the recorded transaction is referred to as a source document; this can come in the form of a check, or an invoice (either a sales invoice or a purchase invoice). Once a source document is received, or a financial transaction occurs, it can be recorded in the accounting journal. The journal reflects the data from a transaction. Once the journal entry is made, it transfer's to the ledger. The process of moving the journal entry to the ledger is called posting the transaction. Once the journal posts, the debits and credits are reflected in the ledger. It is important to note that a debit in the journal will post as a debit in the ledger; there should never be a case where a journal entry debit changes to a ledger credit posting... this would cause issue!
Let's say Jane has $10,000 and she wants to invest in your business. She provides you a check for this amount and you cash it. In exchange you provide Jane with Common Stock. This transaction would affect Assets and Equity(Common Stock). The journal (T-Account) entry would be as follows:
Once the transaction posts to the ledger, it will look like the following:
There are five basic steps to recording a business transaction, as follows:
1) Identify account (i.e. accounts receivable, accounts payable) and identify the account type (i.e. Asset, Liability, or Equity)
2) Determine if the account is increasing or decreasing as a result of the transaction. Refer to Double-Entry Accounting if you are unsure.
3) Document the transaction in the journal.
4) Post the transaction (from the journal to the ledger).
5) Review entries to ensure that the accounting equation is balanced (does Assets still equal Liabilities plus Equity.
Another example for making a journal entry, as follows:
Your company purchases $200 of office related supplies. Since these supplies will benefit the company for future periods, they are an asset until they are used. The key words are "will benefit" and we know they are tangible goods, so they would be considered an Asset. Since we have not paid for these supplies yet, we put them on credit, they will be a Liability for the account Office Supplies, and recorded as Accounts Payable. The entry will look like the following:
To cross-check, or validate, accounting entries, companies will use a Trial Balance. The Trial Balance is an internal document used to verify ledger accounts and ensure there is equality (between debits and credits). The Trial Balance is then used to prepare the Balance Sheet, Income Statement, and Statement of Retained Earnings. It is important to distinguish that the Trial Balance is for internal personnel only. The Balance Sheet, however, is a document (financial statement) that is used by both internal personnel and external personnel (i.e. shareholders). For the Trial Balance all accounts are listed, and their respective balances are transcribed in the appropriate spot (the balance is either a debit or a credit). In summing all accounts, the Total Debits should equal Total Credits. If there is a discrepancy, an in-depth review will be required to find the entry issue- the amount of time required to find errors and make corrections can be extremely timely.
Let's say Jane has $10,000 and she wants to invest in your business. She provides you a check for this amount and you cash it. In exchange you provide Jane with Common Stock. This transaction would affect Assets and Equity(Common Stock). The journal (T-Account) entry would be as follows:
Date | Debit | Credit | |
Sept 3 | Cash | $10,000 | |
Common Stock | $10,000 | ||
Issue Common Stock |
Once the transaction posts to the ledger, it will look like the following:
Cash | |
$10,000 |
There are five basic steps to recording a business transaction, as follows:
1) Identify account (i.e. accounts receivable, accounts payable) and identify the account type (i.e. Asset, Liability, or Equity)
2) Determine if the account is increasing or decreasing as a result of the transaction. Refer to Double-Entry Accounting if you are unsure.
3) Document the transaction in the journal.
4) Post the transaction (from the journal to the ledger).
5) Review entries to ensure that the accounting equation is balanced (does Assets still equal Liabilities plus Equity.
Another example for making a journal entry, as follows:
Your company purchases $200 of office related supplies. Since these supplies will benefit the company for future periods, they are an asset until they are used. The key words are "will benefit" and we know they are tangible goods, so they would be considered an Asset. Since we have not paid for these supplies yet, we put them on credit, they will be a Liability for the account Office Supplies, and recorded as Accounts Payable. The entry will look like the following:
Date | Debit | Credit | |
Sept 3 | Office Supplies | $200 | |
Accounts Payable | $200 | ||
Purchase office suplies on credit |
To cross-check, or validate, accounting entries, companies will use a Trial Balance. The Trial Balance is an internal document used to verify ledger accounts and ensure there is equality (between debits and credits). The Trial Balance is then used to prepare the Balance Sheet, Income Statement, and Statement of Retained Earnings. It is important to distinguish that the Trial Balance is for internal personnel only. The Balance Sheet, however, is a document (financial statement) that is used by both internal personnel and external personnel (i.e. shareholders). For the Trial Balance all accounts are listed, and their respective balances are transcribed in the appropriate spot (the balance is either a debit or a credit). In summing all accounts, the Total Debits should equal Total Credits. If there is a discrepancy, an in-depth review will be required to find the entry issue- the amount of time required to find errors and make corrections can be extremely timely.