That’s weird, right? Let’s use some T-accounts to figure this out. “Did accounts go up or down?” ( Question 2) Let’s see.Ĭlaudio put cash into the business, so the cash account increases, right? At the same time, by putting money into the company, equity increases as well. We can deduce this transaction will affect only assets and equity. He didn’t earn anything or incur any expenses at this point, so these don’t apply. Revenue and expenses are accounts in the income statement. Claudio put in his own money into the business, so we know that equity is affected. At this point, Claudio doesn’t owe anything to anyone, so liabilities aren’t affected.Įquity: this is money owners paid into the company or profits that the business generated that were not distributed to owners. Liabilities: that’s something we owe to others. Cash is an asset, so yes, assets are affected.ĭividends: that’s a distribution of profits of the business to the owners. “Which accounts are affected?” ( Question 1)Īssets: that’s resources the company owns and uses. This is his private money that he invested to start the business. Let’s start with Claudio leaving his home in the morning. Remember Claudio? We followed his Italian beach business in an earlier post ( click here), and now it’s time to record the transactions that happened during this day. And the total debits for each transaction we create must equal total credits. One will be debited, and one will be credited. We also know that to record any transaction you always need at least two accounts. There are only six main account groups we need to worry about, Assets, Dividends, Expenses, Liabilities, Equity, and Revenue ( ADEx LER).

To record any transaction, it must be analyzed to answer two questions: Step 2: Record and post the relevant data from each source document. It includes things like receipts and invoices. Source documents are the evidence that the financial transaction occurred. Step 1: Collect and sort all source documents for each financial transaction. It’s often mixed up with accounting, but it’s not the same.īookkeeping is only a part of the overall accounting process, and it covers these two steps. We’re going to take some activities of a business and turn them into data. Today we’re going to prepare journal entries for some example transactions. If you haven’t read that post yet, I recommend that you do because otherwise what we’re about to cover here is not going to make much sense. In a previous post ( click here) we covered the theory of debits and credits.

Debit credit rules chart