3. Tracking Transactions

We explained in Chapter 1 that a transaction is an exchange of money or an exchange of value. They say in science “What goes up must come down “but in bookkeeping a more accurate expression would be “If one account gives then another account must receive” or “When one account is debited another account must be credited”. The bookkeeper must spend much of his time listing transactions in such a way that shows which account is to be debited and which account is to be credited. As has been said – this is done in the Journal. Each entry in the Journal must be transferred to an entry in two different accounts in the ledger. In the old days this transfer had to be done manually and many mistakes were made by transferring to wrong amount to one of the accounts. These days most bookkeeper use software packages such as Express Accounts and the transfer is handled automatically.

 

Debit and Credit Entries

The following shows a very simple method of setting out a journal entry with the corresponding ledger entries. More information is usually included – for example a longer description of what the transaction is about and perhaps some reference numbers. Also there are many different ways of showing debit and credit entries.

 

Asset Transfers

Example:
Office Furniture is purchased by check. The Checking Account is an asset and Office Furniture is an asset. The Office Furniture account must be debited because the value of this asset increases and the Checking account must be credited because the value of this asset decreases.

 

Asset/Liability Transfers

Example:
A new computer is purchased and paid for by credit card. The Computer account is an asset and increases – so it must be debited. The Credit Card account is a liability and must be credited.

 

Income Transactions

Example:
The Company sold goods on account to G Smith for $315. G Smith will owe us money ( yipee! ), so he will be an asset and his account must be debited. The income account to be credited is the sales account.
Most businesses would have many customers to whom they sell goods, so it becomes too clumsy to keep all of these customers in the general ledger with the other accounts. For this reason, the list of customers is kept in a special ledger called “Accounts Receivable” and only the total of all these accounts is shown in the reports.

 

 

Expense Transactions

Example:
Purchased an office chair on account from “Work Easy” for $215. Office Furniture is an asset and here it will increase in value and therefore be debited. We will owe money to “Work Easy” and they will therefore be a liability.
If you have several suppliers, these details are kept in the “Accounts Payable” ledger and the total is shown as a liability in the Balance Sheet (see later under reports).

 

 

Note that in Express Accounts the Accounts Payable Ledger is accessed via the “Payment or Purchase Transaction” interface.

Correction Transactions

Suppose the bookkeeper makes a mistake and enters the wrong name in the journal. It is normally fairly simple to correct this at a later stage using a correction transaction.

Example:
On 7 September a printer is purchased for $129. Initially the bookkeeper enters this as an asset purchase under computers but then on 16 September the Accountant points out that because the value is low it can be entered as an expense under Office Expenses. This is an important change because under local law Assets are depreciated each year but expenses are totally deducted each year. The Computer's account was debited but now must be credited.

 

 

Note that the effect of having the Computers account debited and credited by the same amount is effectively a cancellation.

Simple Transactions

A simple transaction is one in which only 2 accounts are involved. Suppose the Owner purchases fuel for the business and pays using eftpos from the business bank account.

 

 


Compound Transactions

What would happen if while purchasing fuel for the company car the owner also used the card to purchase some items for use at home? These are not business expenses and they need to be regarded as drawings by the owner. There are two ways of handling such transactions.

  • Single Compound Entry

 

 
  • Two Separate Entries

 

 

 

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