Recording Business Transactions

Resources: Basic Accounting made easy by Prof Win Ballada

Accounting Cycle – The accounting cycle refers to a series of sequential steps or

procedures performed to accomplish the accounting process.

Step 1 Identification of Events to be Recorded

Aim: To gather information about transactions or events generally through the
source documents

Step 2 Transactions are Recorded in the Journal

Aim: To record the economic impact of transactions on the firm in a journal, which is
a form that facilitates transfer to accounts

Step 3 Journal Entries are Posted to the Ledger

Aim: To transfer the information from the journal to the ledger for classification

Step 4 Preparation of a Trial Balance

Aim: To provide a listing to verify the equality of debits and credits in the ledger

Step 5 Preparation of the Worksheet including Adjusting Entries

Aim: To aid in the preparation of financial statements

Step 6 Preparation of the Financial Statements

Aim: To provide useful information to decision-makers

Step 7 Adjusting Journal Entries are Journalized and Posted

Aim: To record the accruals, expiration of deferrals, estimations and other events
from the worksheet

Step 8 Closing Journal Entries are Journalized and Posted

Aim: To close temporary accounts and transfer profit to owner’s equity

Step 9 Preparation of Posting-Closing Trial Balance

Aim: To check equality of debits and credits after the closing entries

Step 10 Reversing Journal Entries are Journalized and Posted

Aim: To simplify the recording of certain regular transactions in the next accounting period

This cycle is repeated each accounting period. The first three steps in the accounting cycle are
accomplished during the period. The fourth to the nth steps generally occur at the end of the period.
Last step is optional and occurs at the beginning of the next period.
This module will focus on the first four steps.
Diagram for Steps 2, 3 and 4
Transaction Analysis (step 1)
• Identify the transaction from source documents
• Indicate accounts
• Ascertain whether each amount is increased or decreased by the transaction
• Using the rules of debit and credit

Source Document
An original record which contains the detail that supports or substantiates a
transaction that will be entered in accounting system.

Journalizing
• The Journal
-is a chronological record of the entity’s transactions. All the effects of a business
transaction in terms of debits and credits. Each transaction is initially recorded in a
journal rather than directly in the ledger. A journal is called the book of original entry.
• General Journal
is the simplest journal

Format
The standard contents of general journal are as follows:

 Date
 Account Tiles and Explanation- the account to be debited is entered at the extreme
left of the first line while the account to be credited is entered slightly indented on
the next line
 Posting reference (P.R)- this will be used when the entries are posted, that is, until
the amounts are transferred to the related ledger accounts
 Debit
 Credit

Journal Entry is shown below

Simple Journal Entry

is an accounting entry in which just one account is debited and one is credited.
Compound Journal Entry
three or more accounts