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Identification And Analysis Of Transactions In Accounting

Identification and analysis of transactions in accounting is an important part of the accounting process. Whenever a business starts to keep chronological records of its business transactions, it aims to maintain books of accounts that are free of errors and easily help in accessing its business performance. In this article, you will find what is a transaction, how the Identification and Analysis Of Transactions In Accounting is processed – let’s go for detail

Table of content.

  • What is the identification of Transaction?
  • Example of Identify Transactions
  • Accounting Transactions and Examples
  • Analysis of Accounting transaction with examples
  • Six-Step of Accounting Transaction Analysis
  • How to Analyze and Identify Transactions in Accounting?
  • Why it is Important to Identify and Analyze Transaction
  • Bottom Line

What is the identification of Transactions?

Identifying Transactions is the initial step of the accounting cycle. Identifying a transaction means determining if it exists and whether It is a monetary transaction related to business. However in books of accounts, only transactions related to business will be recorded that are separate from owners’ transactions. After a transaction has been identified, then it is analyzed. The analysis is basically deciding which accounts will be affected by that Transaction and what changes it will have on books of accounts.

Example of Identify Transaction

Example .1

statement

Michal owns a restaurant. He buys two stoves so that staff can prepare more meals in less time.

In the above chart, we would identify this statement as a transaction; we would recognize that as

 A transaction because it is an exchange. Michal is buying two stoves is an exchange of money for goods(stoves).

Example.2

statement.

Several months later, one of the stoves stops working, and Michael throws it out.

The above chart will identify this statement as a transaction because it is an event even though it is not an exchange. This event will directly cause the financial position of the business to change. Michal is throwing out the stove means that the company will have fewer assets than before.

Example.3

statement

Michal is considering hiring some more employees

By following the charts, we would not identify this as a transaction because it does not have any direct effect on the financial position.

Accounting transaction

 A transaction is an economic event that brings changes in the financial position of a business against the exchange of goods or services. A business activity or transaction that impacts a company’s financial statement. An example is, Apple representing nearly $200 billion in cash and cash equivalents in its balance sheet, is an accounting transaction.

Recording of such Transaction is based on the fundamental accounting equation: Assets = Liabilities +Equity

Accounting Transaction Example

Example:

Nilo owns a cosmetics shop, and she expanded her business with deliveries; she bought a second-hand delivery carrier worth $35,000. She also made the cash payment to the seller and noted the entries in the book of accounts.

Analysis of accounting transaction

The accounting transaction analysis translates the business events and activities that have a computable effect on the accounting equations into the accounting language and writes it into the book of accounts.

An analysis of accounting transactions is the first step of the recording process of the accounting cycle, which is the foundation of accounting types.

This is the process of analyzing business transactions to determine their effects on the book.Therefore, business analysis ensures that the accounting equation stays in balance after each transaction is completed.

How to identify and analyze transaction

 In order to identify and analyze transactions, accountants need to do some assessments. Identifying transactions means determining if a transaction exists and whether or not it is relevant to the business. After the transaction has been identified, it is then analyzed. 

The analysis decides which business accounts will be affected and how they will be affected. But to analyze a transaction one must know which events are considered as transactions.

In accounting, transactions must involve at least one of the below-mentioned two categories.

  1. An event /activity/ process that immediately or directly changes the business’s financial position.
  2.  Goods or services can be exchanged for money or other goods or services carried out by or on behalf of the business.

Six-Step of Accounting Transaction Analysis

  1. Identify if the event is an accounting transaction
  2. Identify what accounts it affects
  3. Identify what type of accounts they are
  4. Identify which accounts are going up or down
  5. Apply the rules of credit and debit to these accounts
  6. Find the Transaction amounts to be entered 

Identify If the Event is an Accounting Transaction

First, you need to determine whether this transaction is a business-nature transaction. An accounting transaction has to involve cash because only signing a contract can be consider as a transaction it must require to make a payment to consider it an economic event or transaction. Other examples include the sale of products, the purchase of equipment, and salary payments.

Identify what Accounts it Affects.

The second step is to identify which accounts the Transaction will affect. For example, John invested cash of $100000 and purchased a truck with a market value of $ 50000 in the business in exchange for the company’s common stock.

The cash invested will be capital. The truck purchase will be an asset for that business, recorded under the capital account and truck account .in. Exchange for that investment, John will get common stock, affecting the common stock accounts.

Identify What Type of Accounts they are

Every Transaction results in a measurable change in the accounting equation. Knowing whether the account belongs to liabilities, assets, or equity will let you know to identify whether the account will have debit or credit balances. In the above example, we identified that accounts involved are Asset accounts, and the common stock account is the Owner’s Equity type account.

Identify which Accounts are Going up or Down

A business uses debit and credit effects to record any transaction. These double-entry procedures keep the accounting equation in balance.so, when John invests cash the capital account and truck(asset) accounts will increase because the company has capital and fixed assets to operate its business.

Apply the rules of Debits and Credits to the Accounts

Every business must record each transaction in two or more related but opposite accounts. Therefore, we debit one account and credit the other in the same transaction amount.

We apply golden rules of accounting to record these transactions as, accounts on the left side increase with a debit entry and decrease with a credit entry, while accounts on the right side increase with a credit entry and decrease with a debit. So, if the plant and machinery account increases, which is an asset account, it will be debited to show an increase in assets. While to show the increasing effect of equity we record on the credit side of an entry.

Find the Transaction Amounts to be Entered

The last step of analyzing transactions is to identify the amounts to be recorded on the debit and credit sides of an entry.

 such as invoices, receipts, and bank statements.

What is the importance of Identifying and

Analyzing Transactions?

Identifying and analyzing transactions is the first step in the accounting cycle. While in this step, we select or identify economic transactions only to record in books of accounts.

Any errors or mistakes that occur at this stage could be carried through to the end of the cycle, resulting in erroneous accounting records and report. Therefore, it needs to be done with attention to detail and accuracy.

Bottom Line

Whenever a business starts to keep chronological records of its business transactions it aims to maintain books of accounts that are free of errors and easily help in accessing its business performance.

 So to achieve this purpose every business first needs to identify transactions that have to be consider in books of accounts. Hence the proper accounting cycle begins from the identification of transactions.

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