In a previous blog, we discussed the five types of accounts every business should have in their books. If you missed it, circle back and check it out before continuing with this one. As a reminder, the five types of accounts are assets, equity, expenses, liabilities, and revenue. Now, let’s talk about transactions. A financial transaction is the activity that impacts your company’s assets, liabilities, and equity.
There are four categories that a transaction can be categorized as: sales, purchases, receipts, and payments. Each of them involves money in some way and is recorded in your books in two locations. To make things simpler for you, we will break down what each of the transactions are and the two places it should be recorded in your books. Now, let’s dive in! We’ll talk each of the four transactions and the two places they should be recorded in your books.
Sales: the exchange of a good/service from buyer to seller for money or credit.
Record as: 1) for the seller, it’s a debit to cash or A/R and 2) a credit to the sales account.
Purchases: the transactions that are required by a business in order to obtain the goods or services needed to successfully create the goods or services the business offers.
Record as: If the purchase is made in cash, 1) debit to the inventory account, and 2) credit to cash. If the purchase was made with a credit card, then 1) debit to the inventory account, and 2) credit to A/P.
Receipts: This transaction refers to a business getting paid for delivering goods or services to another business.
Record as: 1) Debit to cash, and 2) credit to A/R.
Payments: The transaction that refers to a business receiving money for a good or service.
Record as: 1) Credit to cash, and 2) debit to A/P.
Take a look at your own books to see if you have things set up this way. If not, we made need to overhaul your books! Contact us for assistance.