Analysis of Transactions
Recording Process
Journal Entries
Simple Journal Entry &
Compound Journal Entry
Analysis of Transactions
What are Transactions?
In accounting or business terms, any dealing between two persons involving
money or a valuable thing is called transaction.
Human beings are social animals and are bound to adopt a community living
style. Living in a community, essentially means that people interact with other
people and are dependant on each other to fulfil their needs. Every person
cannot fulfil all his needs like food, clothing, housing etc. on his own. He,
therefore, depends on other people for his needs, in return to this providing
others with some of theirs. It means that one will fulfil his needs from others and
will provide others the things of their need in return. Every instance where one
‘gives something’ to ‘get something’ is called a transaction.
Analysis of Transactions
• Accounting transaction analysis involves documenting every transaction that has
an impact on your company's finances. This recordkeeping step is very important
in the accounting process and helps to show how your business transactions
impact your assets, liabilities, and equity.
• Transaction analysis is the act of examining a transaction to decide how it affects
the accounting equation. It's also the first step in the accounting cycle.
• ASSETS= CAPITAL+LIABILITIES (Accounting Equation)
Analysis of Transactions
Accounting transactions refer to any business activity that results in a direct
effect on the financial status and financial statements of the business. Such
transactions come in many forms, including:
• Sales in cash and credit to customers
• Receipt of cash from a customer by sending an invoice
• Purchase of fixed assets and movable assets
• Borrowing funds from a creditor
• Paying off borrowed funds from a creditor
• Payment of cash to a supplier from a sent invoice
Analysis of Transactions
What is transaction analysis chart?
A transaction analysis chart shows the effect of a certain financial
transaction to the accounting process, from the time it is recorded in the
form of journal entries, which includes an analysis on which of the accounts
are affected and which accounts should be debited and credited, up to the
effect of the transaction.
Voucher
Voucher is documentary evidence in a specific format that records the
details of a transaction. It is accompanied by the evidence of transaction.
Steps of Transaction Analysis
• Determine if a transaction has taken place.
• Determine the accounts affected.
• Determine which account is debited and which account is credited.
• Establish the accounts' place in the accounting equation.
• Ensure that the accounting equation would remain balanced.
Dual Aspect of Transactions
For every debit there is an equal credit. This is also called the dual aspect of the transaction
i.e. every transaction has two aspects, debit and credit and they are always equal. This means
that every transaction should have two-sided effect.
For example Mr. A starts his business and he initially invests Rupees 100,000/- in cash for his
business. Out of this cash following items are purchased in cash;
o A building for Rupees 50,000/-;
o Furniture for Rupees 10,000/-; and
o A vehicle for Rupees 15,000/-
This means that he has spent a total of Rupees 75,000/- and has left with Rupees 25,000
cash. We will apply the Dual Aspect Concept on these events from the viewpoint of business.
When Mr. A invested Rupees 100,000/-, the cash account benefited from him. The event will
be
recorded in the books of business as,
Debit Cash Rs.100, 000
Credit Mr. A Rs.100, 000
Dual Aspect of Transactions
• Building purchased – The building account benefited from cash account
Debit Building Rs.50, 000
Credit Cash Rs.50, 000
• Furniture purchased – The furniture account benefited from cash account
Debit Furniture Rs.10, 000
Credit Cash Rs.10, 000
• Vehicle purchased – The vehicle account benefited from cash account
Debit Vehicle Rs.15, 000
Credit Cash Rs.15, 000
From the above example, if the debits and credits are added up, the
situation will be as follows:
Debits
Cash Rs.100,000/-
Building 50,000/-
Furniture 10,000/-
Vehicle 15,000/-
Credits
Mr. A Rs.100, 000/-
Cash 75,000/-
Recording Process
• The recording of transactions in accounting is the process of
capturing financial data relating to business activities and operations
in a systematic and structured manner.
• Recording transactions is to provide accurate and up-to-date
information about the financial position of a company as well as
maintain accurate and complete records of financial transactions.
Recording Process
Purpose of the Recording Process
• preventing/tracking fraud
• providing information for financial statements and tax returns
• helping to identify opportunities and trends
• aiding in decision-making such as the pricing of products and
services.
Recording Process
Basic Steps of Recording Process
The basic steps in the recording process are:
• Analyze each transaction in terms of its effect on the accounts
• Enter the transaction information in a journal
• Transfer the journal information to the appropriate accounts in the ledger
Recording Process
Journal Entries
• Journal entries are made in chronological order and follow the double-
entry accounting system, meaning each will have both a credit and a debit
column. Even when debits and credits are linked to multiple accounts, the
amounts in both columns must be equal.
• Each journal entry contains the data significant to a single business
transaction, including the date, the amount to be credited and debited, a
brief description of the transaction and the accounts affected. Depending
on the company, it may list affected subsidiaries, tax details and other
information.
Journal Entries
Rules of:
Real Account: Assets
Debit (Dr.): What comes in
Credit (Cr.): What goes out
Personal Account:
Debit (Dr.): The Receiver
Credit (Cr.): The Giver
Nominal Accounts:
Debit (Dr.): All Expenses and Losses
Credit (Cr.): All Incomes and Gains
Journal Entries
Format of Journal
Debit (Dr)
Date Particulars L.F Credit (Cr) Rs.
Rs.
Journal Entries
Exercise (Asset):
Furniture purchased for cash Rs. 10,000
Machinery purchased for cash Rs. 50,000
Vehicle sold for cash Rs. 70,000
Date Particulars L.F Debit (Dr) Rs. Credit (Cr) Rs.
09 Mar Furniture A/C Dr 10,000
To Cash A/C 10,000
(Being Furniture Purchased)
09 Mar Machinery A/C 50,000
Dr 50,000
To Cash A/C
(Being Machinery Purchased)
09 Mar Cash A/C Dr 70,000
To Vehicle A/C 70,000
(Being Vehicle sale)
Journal Entries
Exercise (Personal):
Machinery purchased from Aslam Rs. 30,000
Machinery sold to Aslam Rs. 30,000
Date Particulars L.F Debit (Dr) Rs. Credit (Cr) Rs.
09 Mar Machinery A/C Dr 30,000
To Aslam’s A/C 30,000
(Being Machinery Purchased
from Aslam)
09 Mar Aslam’s A/C Dr 30,000
To Machinery A/C 30,000
(Being Machinery Sold to
Aslam)
Journal Entries
Exercise (Nominal):
Salaried Paid Rs. 50,000
Rent Revceived Rs. 30,000
Date Particulars L.F Debit (Dr) Rs. Credit (Cr) Rs.
09 Mar Salary A/C Dr 50,000
To Cash A/C 50,000
(Being Salaried Paid)
09 Mar Cash A/C Dr 30,000
To Income A/C 30,000
(Being Rent Received)
Journal Entries
Example
say a company spends $277.50 catering lunch for employees. The expenses
account increases by that amount, while the cash account, which is an asset,
decreases by $277.50 because that money is now spent.
Date Particulars L/F Debit Credit
5 March 24 Expese A/C Dr $277.50
Cash A/C $277.50
(Expeses occured for lunch
to employees)
Journal Entries
Example
Nawab Sons started their business in the month of March, 2002. Following
are their transactions for the month. Pass journal entries, prepare Ledger
Accounts, and make their profitability analyses.
Sr. # Date Particulars
01 Mar. 01 Started business with Rs. 150,000
02 Mar. 05 Purchased office furniture for cash Rs. 2,000
03 Mar. 07 Purchased goods for cash Rs. 9,000
04 Mar. 10 Paid carriage on purchases Rs. 250
05 Mar. 12 Purchased goods from Saleem & co. Rs. 7,000
06 Mar. 13 Sold goods for cash Rs. 12,000
Journal Entries
Sr. # Date Particulars
07 Mar. 15 Sold goods to Usman & Sons Rs. 25,000
08 Mar. 21 Received cash From Usman & Sons Rs. 25,000
09 Mar. 21 Paid cash to Saleem & co Rs. 7,000
10 Mar. 23 Paid salaries for the month Rs. 2,500
11 Mar. 25 Paid rent Rs. 3,000
12 Mar. 29 Purchased stationery Rs.2,000
13 Mar. 31 Utility bills are accrued Rs. 5,000
Journal Entries
Purpose Journal Entries
• The purpose of a journal entry is to physically or digitally record every
business transaction properly and accurately. If a transaction affects
multiple accounts, the journal entry will detail that information as well.
• Journal entries are the foundation of effective record-keeping. They are
sorted into various charts of accounts and, once verified for accuracy,
posted to the general ledger, which then feeds information to the
financial reports that business decision-makers depend on.
• Accurate and complete journals are also essential in the auditing process,
as journal entries provide detailed accounts of every transaction.
Auditors, both internal and external, will look for entries or adjustments
that lack the proper documentation, explanations or approvals or that
are outside the norm for the business.
Simple Journal Entries
A simple journal entry is the most basic form of recording a single
transaction in accounting. It involves noting the date, accounts affected, and
corresponding amounts for debits and credits.
Simple entries are the most basic type of accounting journal entry. They
involve only two accounts: one debit and one credit.
For example, a simple entry to record the purchase of supplies for cash
would debit the supplies account and credit the cash account.
Example of Simple Journal Entries
Compound Journal Entries
A compound journal entry is an entry in which there is more than one debit,
more than one credit, or more than one of both debits and credits. It is a
combination of several simple journal entries.
Example:
