Page 65 - Accounting Principles (A Business Perspective)

2. Recording business transactions

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questions about potential careers and salaries with them.
In Chapter 1, we illustrated the income statement, statement of retained earnings, balance sheet, and statement
of cash flows. These statements are the end products of the financial accounting process, which is based on the
accounting equation. The financial accounting process quantifies past management decisions. The results of these
decisions are communicated to users—management, creditors, and investors—and serve as a basis for making
future decisions.
The raw data of accounting are the business transactions. We recorded the transactions in Chapter 1 as increases

or decreases in the assets, liabilities, and stockholders' equity items of the accounting equation. This procedure
showed you how various transactions affected the accounting equation. When working through these sample
transactions, you probably suspected that listing all transactions as increases or decreases in the transactions
summary columns would be too cumbersome in practice. Most businesses, even small ones, enter into many
transactions every day. Chapter 2 teaches you how to actually record business transactions in the accounting
process.
To explain the dual procedure of recording business transactions with debits and credits, we introduce you to
some new tools: the T-account, the journal, and the ledger. Using these tools, you can follow a company through its
various business transactions. Like accountants, you can use a trial balance to check the equality of your recorded

debits and credits. This is the double-entry accounting system that the Franciscan monk, Luca Pacioli, described
centuries ago. Understanding this system enables you to better understand the content of financial statements so
you can use the information provided to make informed business decisions.
The account and rules of debit and credit

A business may engage in thousands of transactions during a year. An accountant classifies and summarizes the
data in these transactions to create useful information.
Steps in recording business transactions
Look at Exhibit 9 to see the steps in recording and posting the effects of a business transaction. Note that source
documents provide the evidence that a business transaction occurred. These source documents include such items
as bills received from suppliers for goods or services received, bills sent to customers for goods sold or services

performed, and cash register tapes. The information in the source document serves as the basis for preparing a
journal entry. Then a firm posts (transfers) that information to accounts in the ledger.
You can see from Exhibit 9 that after you prepare the journal entry, you post it to the accounts in the ledger.
However, before you can record the journal entry, you must understand the rules of debit and credit. To teach you
these rules, we begin by studying the nature of an account.
Fortunately, most business transactions are repetitive. This makes the task of accountants somewhat easier
because they can classify the transactions into groups having common characteristics. For example, a company may

have thousands of receipts or payments of cash during a year. As a result, a part of every cash transaction can be
recorded and summarized in a single place called an account.

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