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Recording Business Transactions in Accounting

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  • 0:05 Why Transactions Are Recorded
  • 0:29 Transactions and…
  • 1:41 Recording Transactions
  • 6:53 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Recording a transaction is the first step in the accounting cycle. In this lesson, you will learn why transactions are recorded, where they are recorded, and how they are recorded.

Why Transactions Are Recorded

Have you ever forgotten to record a check in your checking account register? I sure have. It wasn't a huge mistake on my part, but can you imagine what it would be for a business? Not recording something in the right place could significantly affect the financial statements for the business. That's why it's so important to record each and every business transaction that occurs in a business.

Transactions and Double-Entry Accounting

I am sure that you already know what a transaction is, but even so, let me refresh you on the concept. A transaction is an event that occurs in a business that changes the balance of at least two accounts. Why do I say at least two accounts? I say that simply because the accounting system that is used by accounting professionals is called double-entry accounting.

Double-entry accounting states that for every one transaction that occurs, there will be at least two accounts affected. One account will be debited, and one account will be credited. A debit is an entry made on the left side of an account. A credit is an entry made on the right side of an account. These dual effects of a single transaction will either increase or decrease an account balance. That depends on the type of account that it is.

Double-entry Accounting Charts

Looking at the charts, you see that asset and expense accounts have balance increases when they are debited and balance decreases when they are credited. In direct contrast, liability, stockholder's equity, and revenue accounts have balance decreases when they are debited and balance increases when they are credited. These are very important points to know when recording transactions.

Recording Transactions

Recording business transactions is a multi-step process. The first step in recording business transactions is to examine the transaction and decide what accounts will be affected. The second step in recording business transactions is to decide what account will be debited and what account will be credited. The third step in recording business transactions is to actually document the transaction in a journal.

A journal, which is also known as a book of original entry, is the first place that a transaction is written in accounting records. Even when you're using a computerized accounting program, items are still recorded in journals; you just don't manually enter them. The best way to learn how to record business transactions is to actually record some. So let's look at a few examples.

1. Alex owns a music shop. On August 1, he purchases drum heads from Drummers R Us to sell in his store. He pays $875 in cash for the drum heads.

In his first transaction, Alex bought drum heads, which is inventory for his store. He paid for the drum heads with cash. The two accounts that will be affected are cash and inventory.

For Alex's music shop, the inventory account, which is an asset, is debited the $875. This increases the balance in the inventory account by the same amount. Because Alex paid with cash, the cash account will be credited $875. A credit made to an asset account decreases the balance in the account, so the cash account will have an $875 reduction in its balance.

After you decide what accounts are affected by each transaction, you can record, or journalize, the transaction. To do this, you'll make an entry into the journal. You start by listing the date, followed by the name of the account that is debited and the debit amount on the first line. On the next line, and indented slightly, you will put the name of the account that is credited followed by the credit amount.

2. On August 6, Alex sold all the drum heads to the local high school band for a total of $1,500 cash.

In this case, what two accounts are affected? Well, because this is a cash sale, the same two accounts are affected that were affected when Alex purchased the drum heads. The difference is that they will be affected differently. The cash account will be debited $1,500 and will have a balance increase in the same amount. The inventory account will be credited and will have a balance decrease in the same amount.

3. On August 10, Alex has to pay his monthly rent on the building that his music shop is in. He writes a check to Thomas Realty in the amount of $1,000.

In this transaction, the accounts that are affected are rent expense and cash. The rent expense account is debited $1,000. Since expense account balances are increased by debits, this increases the balance in the rent expense account by $1,000. The cash account is credited $1,000. Since cash is an asset account and is credited, the balance in the cash account decreases by $1,000.

4. On August 12, Alex orders more supplies for his shop from Music Central. This time, he buys his supplies on account. The total amount of musical equipment that he buys from Music Central is $4,500.

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