Join Jim Stice for an in-depth discussion in this video How do we record the effect of a transaction?, part of Accounting Foundations: Bookkeeping.
- With our knowledge of the different types of accounts, assets, liabilities and owner's equity, and the use of the terms debits and credits, debit means left and credit means right, we are now ready to actually record the effective transactions. The second step in the accounting cycle is to record the results of transactions in a journal. Journals provide a chronological record of all transactions of a business. They show the dates of the transactions, the amounts involved, and the particular accounts affected by the transactions. Sometimes, a detailed description of the transaction is also included.
This chronological recording of transactions in a journal provides a company with a complete record of its activities. If amounts were recorded directly in the accounts, it would be difficult, if not impossible for a company to trace a transaction that occurred, say, six months previously. Small companies, such as a locally owned pizza restaurant may use only one journal, called a General journal, to record all transactions. Larger companies having thousands of transactions each year may use special journals. An example of a special journal is a Cash receipts journal, in addition to using a General journal.
A specific format is used in recording transactions in a journal entry. The Debit Entry is listed first, the Credit Entry is listed second, and is indented to the right. Normally, the date and a brief explanation of the transaction are considered essential parts of the journal entry. Dollar signs are usually omitted. Unless otherwise noted, this format (mumbles) will be used whenever a journal entry is presented. Now, to illustrate the recording of transactions using our journal entries, let's start a business. You're 18 again and you want to work outdoors and set your own schedule.
So let's start our own Landscaping Business. This business will involve mowing lawns, pulling weeds, trimming and planting shrubs and so forth. We will use this simple business to illustrate the journal entries used to record some common transactions of a business enterprise.
- Reviewing financial statements
- Analyzing transactions
- Categorizing transactions
- Recording a cash acquisition
- Recording the sale of goods or services
- Posting journal entries to accounts