Accounting Lesson 2: Recording

Financial Transactions
Learning Objectives:
By the end of this lesson, you should be able to:

1. Understand the basics of the double-entry accounting system.

2. Identify the different types of accounts and their classifications.
3. Record transactions using debits and credits.
4. Explain how the accounting equation remains in balance after each transaction.

Introduction:
In the previous lesson, you learned about the fundamentals of accounting and the
accounting equation. Now, we'll dive into the practical aspect of accounting: recording
financial transactions.

Double-Entry Accounting:
Double-entry accounting is the foundation of modern accounting. It's based on the
principle that every financial transaction has at least two equal and opposite effects on
the accounting equation. These effects are recorded as debits and credits in various
accounts.

Types of Accounts:
1. Asset Accounts:

 Assets are resources owned by the business.

 Examples include cash, accounts receivable, inventory, and equipment.
 Increased with debits, decreased with credits.

2. Liability Accounts:

 Liabilities are obligations or debts the business owes to external parties.

  Examples include accounts payable, loans payable, and accrued expenses.
 Increased with credits, decreased with debits.

3. Equity Accounts:

 Equity represents the owner's interest in the business.

 Includes capital accounts for owners and retained earnings.
 Increased with credits, decreased with debits.

4. Revenue Accounts:

 Revenue accounts track income generated from the sale of goods or services.
 Increased with credits.

5. Expense Accounts:

 Expense accounts record costs incurred in operating the business.

 Increased with debits.

Recording Transactions:
Let's look at some common transactions and how they are recorded using debits and
credits:

Transaction 1: You invest $10,000 in your business as initial

capital.

 Debit: Cash (Asset) $10,000

 Credit: Owner's Equity (Capital) $10,000

Transaction 2: You purchase inventory for $5,000 on credit.

 Debit: Inventory (Asset) $5,000

 Credit: Accounts Payable (Liability) $5,000

Transaction 3: You sell inventory for $8,000 in cash.

 Debit: Cash (Asset) $8,000

 Credit: Sales (Revenue) $8,000
  Debit: Cost of Goods Sold (Expense) $5,000
 Credit: Inventory (Asset) $5,000

Transaction 4: You pay $2,000 in rent for the month.

 Debit: Rent Expense (Expense) $2,000

 Credit: Cash (Asset) $2,000

Balancing the Accounting Equation:

The key principle in double-entry accounting is that every transaction keeps the
accounting equation in balance:

Assets = Liabilities + Owner's Equity

 After Transaction 1: $10,000 = $0 + $10,000

 After Transaction 2: $15,000 = $5,000 + $10,000
 After Transaction 3: $15,000 = $5,000 + $10,000
 After Transaction 4: $13,000 = $5,000 + $8,000

The equation remains balanced after each transaction, ensuring accuracy and
consistency in your financial records.

Conclusion:
In this lesson, you've learned the fundamental principles of double-entry accounting, the
types of accounts, and how to record common financial transactions using debits and
credits. Understanding these concepts is crucial for maintaining accurate financial
records and preparing financial statements, which we'll explore in future lessons.