When you start learning bookkeeping, recording business transactions is one of the first things you need to understand. A business makes sales, buys supplies, pays bills and receives money from customers. Each of these activities involves a transaction, and it needs to be recorded properly.
It sounds simple but beginners often get confused about what to enter, where to enter it and which documents to keep. Well you don’t have to know everything about accounting before you can begin recording transactions. First, get an understanding of what happened in the business and make sure that the details are entered correctly.
Let’s go through the process with some common examples.
What Is a Business Deal?
A business transaction is any activity that impacts the money, property, debts or financial position of a business. For example, a business transaction occurs when:
- Customer buys goods or services.
- The company purchases office supplies.
- Rent is paid in respect of business premises.
- A customer pays an overdue invoice.
- The business gets money from a loan.
- The owner invests money in the business.
Not all transactions have a role in the immediate exchange of money. Say a business sells goods to a customer, but allows them 30 days to pay. A transaction has still taken place. The company has closed a deal, no matter whether the cash has not yet been deposited in its bank account.
This difference is important to know when you are learning bookkeeping.
First, Understand What Happened
Get to know the transaction before you enter anything into a bookkeeping system. Let’s say a small business buys $200 worth of office supplies and pays with a bank transfer.
If you only enter $200 as an expense, you may know how much money was spent, but you will not have enough information to understand the purchase later. A good transaction record should tell you what happened without having to guess.
Keep the Invoice or Receipt
Every transaction should have some supporting information. This may be an invoice, receipt, bank statement, payment confirmation or another document that explains what took place.
For example, when a business purchases a computer, the supplier’s invoice shows what was purchased and how much it cost. The payment record can then show when and how the business paid for it.
There is a difference between an invoice and a receipt. An invoice usually tells the customer how much they need to pay. A receipt confirms that payment has been made.
If a customer receives an invoice today but pays next week, both parts of the transaction need to be recorded correctly.
Do not rely on memory to explain business purchases. Keep the documents and make sure they can be found when needed.
Learn How Transactions Are Recorded in the Accounts
Once you put your feet up to identify transactions, the next step is learning how they lead to change in the accounts.
In double-entry bookkeeping, every transaction has to say the least two entries. These are added to the records using debits and credits.
Check Your Entries Against the Original Documents
Entering a transaction is not the end of the job. You should go through it to make sure that the information matches the invoice, receipt or payment record.
Cast an eye over the date and amount. Check the description and make sure the transaction has been entered in accordance with the correct account.
It is also important to check your bookkeeping records against the bank statement. If the bank shows a payment of $200 but your books show $220, you need to find out why the amounts are different.
Perhaps the wrong figure was entered, or a bank fee was added. Finding the reason is more useful than simply changing the amount to make the figures match.
Do Not Leave Transactions Until the End of the Month
It is much easier to record business transactions while the details are still fresh. If you wait several weeks, you may forget what a particular payment was for or misplace the receipt.
Try to set aside some time regularly to enter sales, purchases and payments. Keep your documents in one place and check your entries as you go.
You should also keep business and personal transactions separate wherever possible. If you use business money for a personal purchase, do not record it as an ordinary business expense. It needs to be treated according to the nature of the transaction and the business structure.
Final Thoughts
It takes sharpen your skills to learn to cover all the bases while recording business transactions. You may make a few mistakes at first, but the key is to know why a transaction is recorded and what accounts it impacts. Don’t hurry entries just to get them into the system. Check the documents, understand the transaction and enter the details in the right place.
Once you get used to recording everyday business activities, bookkeeping becomes easier to follow. You will also have records that explain what has happened in the business and can be checked whenever the information is needed.
