Analyzing a transaction involves the following processes.
- Journal Voucher
- Ledger Accounts/ T accounts
- Trial Balance
- Financial Statement
Transactions are any event that has financial impact on the business or person and can be measured reliably. For example, Queen purchases new set of furniture for NGN 2 million cash.
Every transaction must have two sides:
- The giver side
- The receiver side
This is called Double Entry system in accounting. It records the dual effects of every transaction of a company. Transactions affect at least two accounts; the assets, liabilities and the stockholder’s equity.
An account can be represented by the letter T. We call them T-accounts. The vertical line in the letter divides the account into its two sides: left and right. The account title appears at the top of the T. The left side of each account is called the debit side, and the right side is called the credit side.
Every business transaction involves both a debit and a credit. The debit side of an account shows what you received. The credit side shows what you gave.
Rules of Debit & Credit
The type of account determines how we record increases and decreases.
- Increases in assets are recorded on the left (debit) side of the account. Decreases in assets are recorded on the right (credit) side.
- Conversely, increases in liabilities and stockholders’ equity are recorded by credits. Decreases in liabilities and stockholders’ equity are recorded by debits.
Additional Stockholders’ Equity Accounts: Revenues and Expenses
Stockholders’ equity also includes the two categories of income statement accounts, Revenues and Expenses:
- Revenues are increases in stockholders’ equity that result from delivering goods or services to customers
- Expenses are decreases in stockholders’ equity due to the cost of operating the business.
Dividends and Expense accounts are exceptions to the rule. Dividends and Expenses are equity accounts that are increased by a debit. Dividends and Expense accounts are negative (or contra) equity accounts.
A journal is a chronological record of all company transactions listed by date. But the journal does not indicate how much cash or accounts receivable the business has.
The ledger is a grouping of all the T-accounts, with their balances. For example, the balance of the Cash T-account shows how much cash the business has. The balance of Accounts Receivable shows the amount due from customers. Accounts Payable shows how much the business owes suppliers on open account, and so on.
In the phrase “keeping the books,” books refer to the accounts in the ledger. In most accounting systems, the ledger is computerized.
Entering a transaction in the journal does not get the data into the ledger. Data must be copied to the ledger—a process called posting. Debits in the journal are always posted as debits in the accounts, and likewise for credits.
Accounts After Posting to the Ledger
Group the accounts under assets, liabilities, and equity. Each account has a balance, denoted as Bal., which is the difference between the account’s total debits and its total credits.
A horizontal line separates the transaction amounts from the account balance. If an account’s debits exceed its total credits, that account has a debit balance, If the sum of the credits is greater, the account has a credit balance.