The accounting cycle starts with the analysis of transactions.

A proper analysis of business transactions is

very important to make a correct journal entry.

Steps Of Transaction Analysis

Analysis of business transactions is a mental process which includes the following four steps:

Ascertaining the accounts involved in the transaction

Ascertaining the nature of accounts involved in the transaction

Determining the effects in terms of increase and decrease

Applying the rules of debit and credit

Ascertaining the accounts involved

Every business transaction involves two or more accounts.The process of analyzing a business
transaction starts with finding out these accounts. For example, Mr. John starts a business with cash
$25,000. It is a transaction which includes two accounts – “cash account” and “capital account”.

Ascertaining the nature of accounts

The second step of transaction analysis is to ascertain the nature of accounts found in step 1. In above
example, cash is an asset account and capital is an owner’s equity/capital account. Click here to read
more about classification of accounts.

Determining the effects in terms of increase and decrease

After ascertaining the nature of accounts in step 2, we determine which account is increasing and which
one is decreasing as a result of transaction being analyzed. It is necessary for the proper application of
rules of debit and credit on each account. In above example, the two accounts involved are “cash
account” and “capital account”, both are increasing.

Applying the rules of debit and credit

The final step of transaction analysis is to apply the rules of debit and credit on accounts. In this step, we
determine which account is to be debited and which one is to be credited on the basis of increase and
decrease in accounts determined in step 2. In our example, cash account would be debited because
when an asset increases, its account is debited. The other account involved is John’s capital which would
be credited because when capital increases, its account is credited. Click here to read more about rules
of debit and credit.