Every financial transaction needs to be recorded for accurate accounting. Although this sounds daunting, it isn’t if you break it down into small chunks or transactions.
You must record everything related to your cash, sales, purchases, expenses, and payroll.
All of this and more are tracked in your general ledger using your chart of accounts, including depreciation, amortizations, owner investments, and distributions.
These standard business processes are accounting transactions, and everything should be recorded.
Most businesses will record the following types of transactions:
Accounts Receivable
Income due to be received from your customers.
Examples:
- Invoicing
- Credit advances to clients
Cash Receipts and Disbursements
Records of all cash coming into and going out of your business.
Examples:
- Customer sales and payments
- Vendor purchases and payments
- Petty cash transactions
- Payroll processing
- Normal monthly bills
Inventory
Merchandise purchased by your business to be resold to customers, usually at a higher value.
Examples:
- Goods for sale
- Raw materials to create a finished good
- Inventory markups/markdowns/losses
Owner’s Equity
Withdrawals of cash or other assets for the owner’s personal use, recorded as a credit to cash and a debit to owner’s equity.
Examples:
- Owners Draw
- Investor Capital
- Loans
Retained Earnings
Retained earnings are the financial profits that your company has earned from inception, minus any dividends (payments made to shareholders or investors).
Examples:
- Current Years’ Earnings
- Accumulated Earnings
Accounts Payable
Any short-term debt, excluding payroll, that your business is expected to pay.
Examples:
- Vendor invoices
- Utility bills
- Advertising and marketing
- Office supplies
Loans Payable
Any long-term debt with an arrangement for repayment. These will usually carry interest fees.
Examples:
- Mortgage or vehicle payments
- Equity credit line
- Vendor credit
- Credit cards
Sales
Sales of merchandise or service to a customer.
Examples:
- Quotes, orders, and sales invoices
- Accepting customer payments
- Tracking receivables
Purchases
The goods and services purchased by your business.
Examples:
- Merchandise for resale or development
- Technology expenses
- Office supplies
- Overhead expenses
- Tracking payables
Depreciation and Amortization
Depreciation is used for tangible items, like buildings and equipment and will help you spread out the cost of an asset over its useful life and determine the amount you can deduct as an expense per year. It accounts for the wear and tear of the asset over its lifetime. Amortization is the same concept, but for intangible assets like trademarks or patents.
Examples:
- You buy a new generator for $10,000 and it can be depreciated over 10 years. Therefore, you’d record $1,000 in depreciation expense each of those 10 years.
- You receive a patent for a process you’ve developed, therefore you can deduct the expenses evenly over it’s useful life.
Takeaways
- Every financial transaction, from cash receipts and disbursements to expenses, payroll, and purchases, must be accurately recorded. This is done using a general ledger and a chart of accounts, which tracks various financial activities like depreciation, amortization, sales, and more.
- The text outlines key types of transactions businesses need to record, including cash receipts, accounts payable (short-term debt), loans payable (long-term debt), purchases, inventory, accounts receivable, sales, owner’s equity, and retained earnings.
- Depreciation (for tangible assets) and amortization (for intangible assets) are important for spreading out the costs of assets over their useful lives, allowing businesses to account for wear and tear or usage and claim deductions for these costs on an annual basis.
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