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CHAPTER 3: RECORDING BUSINESS TRANSACTIONS

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The starting point of any accounting system or process is the business transactions. To show that a business transaction has taken place, there must be documentary proof (i.e. source documents). This is also in conjunction with the objectivity principle in accounting.

All source documents contain certain information & the amount of detail depends on whether a cash or credit transaction was made.

For cash transactions, the details would include:

• date the transaction occurred
• amount of money involved
• description of the transaction

For credit transactions, other than the details provide for cash transactions, additional details might include:

• names & contact details of the parties involved
• terms & conditions of the transaction including details of delivery
• authorised signatures

In very large businesses with many departments, there would be multiple copies of one source document. Multiple copies of a source document means that there are many copies of the same accounting data. Having multiple copies will allow the data to be used by many different parties. e.g. Creative Technology Limited, a listed company in Singapore, will issue at least 4 copies of a Sales Invoice (Source Document) to its customer, Accounts Department, Sales Department & Logistic Department.

Once the transaction has taken place, the accountant will use the source document to record the transaction in the books of the business or in the accounting records.

An efficient way of recording transactions in the accounting records of a business, is to follow a special set of rules known as "double-entry system of recording". This system introduces the idea of "debit" and "credit" to record transactions.

When debit & credit are taken together with the elements of the accounting equation, the rules of the double-entry accounting system come into effect.

The rules are as follows:

	DEBIT (DR)	CREDIT (CR)
Assets	Increase	Decrease
Liabilities	Decrease	Increase
Owner's Equity	Decrease	Increase
Expenses	Increase	Decrease
Revenue	Decrease	Increase

It is the rules of double-entry book-keeping that cause "debit" and "credit" to take on the meaning of "increase" or "decrease" when used together with relevant accounts.

Balancing off Accounts

An account provides a summary of all the transactions that affect each asset, liability, revenue, expense & owner's equity of a business. At the end of the month, it is a normal practice to balance off an account (i.e. find the remaining balance as a result of all the increases and decreases that have been recorded for the month)

The steps to balance off an account are:

1. Total up all the entries on the debit side of the account
2. Total up all the entries on the credit side of the account
3. Find the differences between the totals and insert the balancing figure on the side of the account that is short

Alan Goh Jiang Wee © 2001-2002