Analyzing transactions and recording them as journal entries is the first step in the accounting cycle. It begins at the start of the accounting period and continues during the whole period. Transaction analysis is the process of determining whether a particular business event will effect the assets, liabilities or equity of the business and the magnitude of its effect (i.e. its currency value). When analyzing transactions, accountants also classify them appropriately and record them according to the debit-credit rules. Business transactions are those events which cause change in the value of its assets, liabilities or equities.
The following example illustrates how to record journal entries:
To illustrate the total accounting process we extracted some transaction of a company and step by step procedures are described.
Company A was incorporated on January 1, 2010 with an initial capital of 5,000 shares of $20 par value common stock. During the first month of its operations, the company engaged in following transactions:
Date
|
Transaction
|
Jan 2
|
An amount of $36,000 was paid as advance rent for three months.
|
Jan 3
|
Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining amount was recognized as a one year note payable with interest rate of 9%.
|
Jan 4
|
Purchased office supplies costing $17,600 on account.
|
Jan 13
|
Provided services to its customers and received $28,500 in cash.
|
Jan 13
|
Paid the accounts payable on the office supplies purchased on January 4.
|
Jan 14
|
Paid salaries to its employees for first two weeks of January, aggregating $19,100.
|
Jan 18
|
Provided $54,100 worth of services to its customers. They paid $32,900 and promised to pay the remaining amount.
|
Jan 23
|
Received $15,300 from customers for the services provided on January 18.
|
Jan 25
|
Received $4,000 as an advance payment from customers.
|
Jan 26
|
Purchased office supplies costing $5,200 on account.
|
Jan 28
|
Paid salaries to its employees for the third and fourth week of January: $19,100.
|
Jan 31
|
Paid $5,000 as dividends.
|
Jan 31
|
Received electricity bill of $2,470.
|
Jan 31
|
Received telephone bill of $1,494.
|
Jan 31
|
Miscellaneous expenses paid during the month totaled $3,470
|
The first step of accounting process is identification of transactions. As all of this events selected here are measurable in terms of money so these should be recorded and in the next step of accounting process are maintained for these.
