Recording Transactions

What is a Transaction in Accounting?

An agreement between the buyer and the seller based on which goods and services are exchanged is called a transaction. Transaction record in accounting is defined as a business occurrence that has a monetary effect on the financial records of a firm. 

Example: Purchase of machine, land or building, sale to a customer in credit or cash, etc. Accrual and Cash accounting are two ways in which any business transaction is recorded. In accrual-based accounting, the focus is on the transactions where income is earned and expenses are incurred, whereas Cash accounting income is recorded when credit payments or cash payments are made.

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What are a Transaction in Accounting and the Methods of Transaction Records?

So what is transaction accounting? When a transaction in accounting occurs, it can be recorded in various ways. Some of them are listed as follows that will help you understand the fundamental question of “What is a transaction in accounting?”

Journal and Ledger Entries

The first thing any accountant will learn is recording a transaction in the form of a journal. This is considered as the most basic way to record any type of transaction. In Journal and ledgers, the accountant manually adds the debit and the credit for each transaction. Therefore, this process is subject to error. In practical scenarios, Journals are not used. Instead, automated approaches such as accounting software like Tally are used to record simple transactions. 

Receipts

If a supplier invoice is received, the accountant can record it in the accounts payable section of any accounting software. This will create a journal entry that will credit the accounts payable and debit the expenses. 

Issuance of Invoice

When issuing an invoice to a supplier, the accountant will first enter data regarding price, quantity and tax amount to make a bill in the accounting software and then the software will automatically credit the sales account. 

Supplier Payments

When a payment is made to the supplier, the accountant will enter the invoice number in the software which will result in a credit or cash account in the transaction records of the firm. 

Paychecks

The Payroll management system is used by the accounts to manage employee payments for salary and other incentives. The amount to be paid and the hours worked by the employee are added in the software along with other relevant information. The software then creates a journal where the cash account gets credited.

Fun Facts

1. History is written by Accountants: The first-ever recorded name in human history belonged to an accountant. The record was made 5000 years ago. The name of the accountant was “Kushim”

2. The father of modern accounts is Luca Pacioli. He was an Italian accountant who taught Leonardo da Vinci. 

Solved Example

All the above-mentioned techniques of maintaining transaction records create the necessary accounts and ledgers. From here the transaction gets made into proper financial statements and bookkeeping takes place.

The following example will explain the basic method of recording transactions in the form of a journal. 

1. Recording of Transaction 1 NCERT Solutions

Books of Mr. A

Date

Particulars

L.F

Debit Amount

Credit Amount

2020

Aug 19

Cash A/c   Dr.

To Capital A/c


(Being business started with cash)

 

1,00,000

1,00,000

 

The business was started by Mr A on 19th August 2020 with cash of Rs 1,00,000. Record the following transaction in the books of Mr A

2. Recording of Transaction 2 NCERT Solutions

Goods purchased by Ravi from Mahesh for Rs 10,000 on 19th August 2020.

Books of Ravi

Date

Particulars

L.F

Debit Amount

Credit Amount

2020

Aug 19

Purchase A/c   Dr.

To Mahesh A/c


(Being goods purchased on credit)

 

10,000

10,000

  

Process of the Recording of Transactions

Seven steps are taken while recording transactions. The seven steps are:

  • Analyzing each transaction and determine the effect of the transaction on different accounts

  • Recording the transaction in the form of a double-entry bookkeeping journal.

  • Transferring the information that is recorded in the journal to different types of ledger accounts.

  • Prepare a trial palace which will help determine the error in recording accounts, if any,

  • Make adjustment entries wherever needed

  • Prepare the adjusted trial balance

  • Finally, complete bookkeeping by preparing financial statements of the balance sheet and profit and loss account.

There are certain documents called transaction source documents that help determine the related business transactions in financial records. Examples of such documents are Bank stunts, cash register, credit card receipts, packing slip, time card, etc.

FAQ (Frequently Asked Questions)

Q1. What is a Transaction in Accounting?

Ans: An agreement between the buyer and the seller based on which goods and services are exchanged is called a transaction. Transaction record in accounting is defined as a business occurrence that has a monetary effect on the financial records of a firm. Example: Purchase of machine, land or building, sale to a customer in credit or cash, etc. 

Q2. What are the Basic Rules of Keeping Transaction Records in Accounting?

Ans: The double-entry bookkeeping system is the standard practice of accounting all around the world. In the double-entry system, every account is T-shaped, these two sides represent the debit and the credit side. The debit is the left-hand side and credit becomes the right-hand side of the T-shaped account. The most important rule for a double-entry bookkeeping system is that the total amount on the left-hand side of an account should be equal to the amount on the right-hand side. In other words, the debt amount should be equal to the credit amount. If this isn’t the case, then the accounts will not tally and will indicate an error in calculation or an error in the recording of transactions.

Q3. What are the Golden Rules of Accounting? What is Going to be a Concern in Bookkeeping?

Ans: Understanding the golden rules of accounting is critical for students to gain in-depth knowledge about the subject. The mentioned below are the three golden rules of accounting:

  1. Debit the receiver, credit the giver: Personal accounts

  2.  Debit what comes in, credit what goes out: Real accounts

  3.  Debit all expenses and losses, Credit all Incomes and gains: Nominal accounts

The concern would be if a company has its external existence. Once a firm is formed, the only way it can be declared dead is through the dissolution of the firm. Based on this assumption, the firm does business as usual until the end of the next financial year or accounting period.