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These two events may briefly interrupt the operation of the business. However, they are not
measurable in terms that affect the solvency and profitability of the business. We use the debit and credit rules to record business transactions.

  • The ledger or the general ledger contains all the accounts, meaning all the assets, liabilities, and stockholders’ equity accounts (A, L, C, W, R, E).
  • Equity accounts have normal credit balances.
  • For most transactions that involve two accounts, they are known as simple entries.
  • So therefore you use the account called accounts receivable denoting that you will receive the money later.

Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law. Wages expense are the payments to employees that earn hourly wages.


You can either pay the bill immediately, expensing it to the appropriate account, or you can record it in accounts payable to pay at a later date. The income statement includes revenues and expenses. Revenues minus expenses equals either net income or net loss. If revenues are higher, the company enjoys a net income. If the expenses are larger, the company has a net loss.

  • From now on, we will not say left or right, but we will say debit or credit.
  • The supplies account includes office supplies that are used in the business.
  • According to the revenue recognition principle in Module 2, you recognize revenue when it is earned, not when it is collected in cash.
  • This includes everything from recording your latest electric bill in your general ledger for future payment to recording depreciation expenses as an adjusting entry.
  • Once the analysis is done in Step 1, everything from now on is simple logic.

The general ledger serves as the eyes and ears of bookkeepers and accountants and shows all financial transactions within a business. Essentially, it is a huge compilation of all transactions recorded on a specific document or in accounting software. Equity decreases by debits (left side) and increases by credits (right side) to the account. Equity accounts have normal credit balances. Assets increase by debits (left side) and decrease by credits (right side) to the account.

off ACCA & CIMA Books

Again, posting is simply transferring the information from the journal to the ledger. And, the ledger is a list of all your accounts in a certain order – A, L, C, W, R, E. By the way, this is also the order the accounts appear on a trial balance (next step of the accounting cycle) and  the balance sheet.

Journal entries for business transactions

If you need to record this manually, it would be recorded in the cash disbursements journal. This is how you would need to record the entry in accounts receivable. Remember, if you’re using accounting software, this process is completed automatically when the invoice is created. For example, let’s say your business receives a bill for $75 for office cleaning that is due at the end of the month. You would record the expense in the appropriate month and record the amount due in accounts payable.

Prepaid expenses

So, let’s start with the first account type – asset. For assets, debit means increase, and credit means decrease. Now, liabilities and OE are on the other side of the accounting equation.

So, while assets behave one way, logic will dictate that liabilities and owner’s equity will behave the opposite as they are on the opposite side of the equation. Therefore, for liabilities and owner’s equity accounts, debit means decrease and credit means increase. Before you can visualize the
eight steps in the accounting cycle, you must be able to recognize a business transaction. Business
transactions are measurable events that affect the financial condition of a business. For example,
assume that the owner of a business spilled a pot of coffee in her office or broke her leg while skiing.

Andrew receives shares of stock from the company. All the transactions are recorded in a journal. The advantage of using T-accounts is that every account has rules to increase and decrease the account.

The accounting system in diagrammatic form

For example, let’s say that you just invoiced a customer for $208. Posting dates and amounts with debit to office supplies, credit to cash. All expense accounts will have the word expense, such as wages expense, salary expense, rent expense, etc.

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