Recording Transactions

Accurate transaction recording is the heart of bookkeeping. This guide covers the principles and practices for recording business transactions correctly.

The Double-Entry System

Every transaction affects at least two accounts—this is the fundamental principle of double-entry bookkeeping.

Key Rule: Debits must equal credits for every transaction.

Example: Purchase Office Supplies for $200 Cash

Debit: Office Supplies (Asset)     $200
Credit: Cash (Asset)                      $200

What happened:

• Office Supplies increased (debited)
• Cash decreased (credited)
• Debits = Credits ($200 = $200) ✓

Common Transaction Types

1. Cash Sales

Scenario: Sold products for $1,000 cash

Debit: Cash                         $1,000
Credit: Sales Revenue                      $1,000

2. Credit Sales

Scenario: Sold services for $2,500 on account

Debit: Accounts Receivable          $2,500
Credit: Service Revenue                    $2,500

3. Receipt of Payment

Scenario: Customer paid $2,500 owed

Debit: Cash                         $2,500
Credit: Accounts Receivable                $2,500

4. Purchase on Credit

Scenario: Bought inventory for $3,000 on account

Debit: Inventory                    $3,000
Credit: Accounts Payable                   $3,000

5. Payment to Vendor

Scenario: Paid vendor $3,000 owed

Debit: Accounts Payable             $3,000
Credit: Cash                               $3,000

6. Owner Investment

Scenario: Owner invests $10,000 cash

Debit: Cash                        $10,000
Credit: Owner's Capital                   $10,000

7. Owner Withdrawal

Scenario: Owner withdraws $5,000

Debit: Owner's Draws                $5,000
Credit: Cash                               $5,000

8. Loan Receipt

Scenario: Received $50,000 bank loan

Debit: Cash                        $50,000
Credit: Loan Payable                      $50,000

9. Loan Payment

Scenario: Paid $1,000 loan ($800 principal, $200 interest)

Debit: Loan Payable                   $800
Debit: Interest Expense               $200
Credit: Cash                               $1,000

10. Payroll

Scenario: Paid $10,000 gross wages ($8,500 net, $1,500 withholdings)

Debit: Wage Expense                $10,000
Credit: Cash                               $8,500
Credit: Payroll Tax Payable                $1,500

Recording Process

Step 1: Gather Source Documents

• Invoice
• Receipt
• Bank statement
• Contract
• Any supporting documentation

Step 2: Analyze the Transaction

Ask:

• What accounts are affected?
• Are they assets, liabilities, equity, revenue, or expenses?
• Do they increase or decrease?
• Should they be debited or credited?

Step 3: Create Journal Entry

Record in chronological order with:

• Date
• Account names
• Debit and credit amounts
• Brief description
• Reference number

Step 4: Post to Ledger

Transfer entries to individual account ledgers (usually automated in software).

Step 5: Verify

Check that debits equal credits and transaction makes sense.

Best Practices

1. Timeliness

Record transactions daily or at least weekly. Don't let them pile up.

2. Accuracy

• Double-check amounts
• Verify account selections
• Ensure proper dates
• Attach source documents

3. Consistency

• Use same accounts for similar transactions
• Follow established procedures
• Maintain naming conventions

4. Documentation

• Always attach or reference source document
• Include clear descriptions
• Note check numbers, invoice numbers
• Explain unusual transactions

5. Review

• Reconcile accounts regularly
• Review for errors
• Verify unusual entries
• Check for duplicates

Common Recording Mistakes

Mistake	Impact	Solution
Debits don't equal credits	Books won't balance	Always verify totals
Wrong account selected	Incorrect reports	Review chart of accounts
Transposed numbers	Wrong amounts	Double-check entries
Missing transactions	Incomplete records	Daily recording routine
Duplicate entries	Overstated amounts	Check for existing entries
Wrong date	Incorrect period reporting	Verify transaction date

Using Accounting Software

Advantages

• Automated posting to ledger
• Built-in error checking
• Attached documents
• Recurring transaction templates
• Bank feed integration

Popular Software

• QuickBooks: Comprehensive, widely used
• Xero: Cloud-based, user-friendly
• FreshBooks: Great for service businesses
• Wave: Free for small businesses
• Sage: Good for larger businesses

Software Tips

1. Set up chart of accounts properly first
2. Use categories consistently
3. Reconcile regularly
4. Attach digital copies of documents
5. Use recurring transactions for regular entries
6. Take advantage of bank feeds
7. Regular backups

Special Transaction Scenarios

Sales Tax Collected

Scenario: Sold $1,000 of goods plus $80 sales tax

Debit: Cash                         $1,080
Credit: Sales Revenue                      $1,000
Credit: Sales Tax Payable                     $80

Purchase with Multiple Items

Scenario: Bought office supplies ($200) and equipment ($800) for $1,000

Debit: Office Supplies                $200
Debit: Equipment                      $800
Credit: Cash                               $1,000

Partial Payments

Scenario: Received $1,000 of $2,500 owed

Debit: Cash                         $1,000
Credit: Accounts Receivable                $1,000

(Balance of $1,500 remains in Accounts Receivable)

Next Steps

Master cash management to track and optimize your business's most critical asset.