Accounting Transaction Analysis

Accounting transaction analysis is the process involved of the first step in the accounting cycle which is to identify and analyze bookkeeping transactions.

The analysis involves using information from the accounting source documents to identify firstly whether the transaction is an accounting transaction, and then applying the basic bookkeeping rules of debit and credit to break down the transaction into its debit and credit components parts.

Transactions can be external transactions or internal transactions. External transactions involve the business and a third party such as a supplier, they are easier to analyse as there will always be source documents evidencing the transaction. Internal transactions, such a depreciation adjustments, involve only the business itself and may not have accounting source documents.

Six Steps of Accounting Transaction Analysis

Accounting transaction analysis can be broken down into six steps:

1. Is the transaction an accounting transaction?

In order to be identified as an accounting transaction, the transaction must relate to the business and involve a monetary amount. For example, the signing of a rental agreement is not in itself an accounting transaction as there is no monetary amount involved. However, the payment of a deposit under the rental agreement is an accounting transaction, it relates to the business, and there is a monetary amount involved.

2. Which ledger accounts does the transaction affect?

Identify which accounts the transaction if going to affect. For example, the cash payment of rent for the accounting period, is clearly going to affect the cash account and the rent expense account.

3. What account type does each of the accounts involved belong to?

Each account can identified with an account type, either assets, liabilities, equity, revenue or expenses. Using the rent example, the cash account would be identified as an asset account, and the rent expense account is identified as an expense account.

4. Is the balance on each account going to increase or decrease as a result of the transaction?

In the example used above, cash is going to leave the business when the rent is paid, so the cash account should decrease. The amount of rent paid is going to increase, so the rent expense account should increase as a result of the transaction.

5. Will this increase or decrease lead to each account being debited or credited?

The purpose of identifying the type of account in step 3. above, is to make it easier to decide whether an increase or decrease requires the account to be debited or credited.

Remember, the extended accounting equation is:

Assets + Expenses = Liabilities + Equity + Revenue

Items on the left hand side of the equation are increased by a debit and decreased by a credit, items on the right of the equation are increased by a credit and decreased by a debit.

6. What is the amount to be entered into each account?

Identify from the source documents the monetary amount to be entered for each account.

Accounting Transaction Analysis Table

The accounting transaction analysis described in the six steps above, is best set out in table format to ensure that important considerations about the transaction are not overlooked.

In the above example, suppose the cash payment for the rent was the amount of 4,000, using the six step process we have the following analysis of the transaction.

  1. This is an accounting transaction as it relates to the business and involves a monetary amount.
  2. The accounts involved are the cash account and the rent expense account.
  3. The two accounts types are an asset account (cash) and an expense account (rent).
  4. Cash is decreased and rent is increased by the transaction.
  5. An decrease to an asset account is a credit, an increase to an expense account is a debit.
  6. For each account the monetary amount is 4,000

This can then be summarized in the accounting transaction analysis table as follows:

Accounting Transaction Analysis Table
Transaction: Cash payment of rent expense for the period
Accounts Type Change Dr or Cr Amount
Cash Asset Decrease Credit 4,000
Rent Expense Increase Debit 4,000

Injection of Capital Transaction Example

As a second example of accounting transaction analysis, suppose a business is started with a capital injection of 30,000 cash by the owner.

In this example, the cash of 30,000 is injected by the owner as capital and the six steps involved in the accounting transaction analysis are:

  1. This is an accounting transaction as it relates to the business and involves a monetary amount.
  2. The accounts involved are the cash account and the capital account.
  3. The two accounts types are an asset account (cash) and an equity account (capital).
  4. Cash is increased and capital is also increased by the transaction.
  5. An increase to an asset account is a debit, an increase to an equity account is a credit.
  6. For each account the monetary amount is 30,000

This can be summarized in the accounting transaction analysis table as follows:

Accounting Transaction Analysis Table
Transaction: Capital injection of 30,000 cash by the owner of the business.
Accounts Type Change Dr or Cr Amount
Cash Asset Increase Debit 30,000
Capital Equity Increase Credit 30,000

Accounting Transaction Analysis Template

To help you produce your own tables, we have created an accounting transaction analysis template in PDF format.

accounting transaction analysis table
Accounting Transaction Analysis Template Preview

The template is available for download by following the link below:

There are numerous types of accounting transaction in double entry bookkeeping all of which can be analyzed using the accounting transaction analysis table method. For ease of reference additional examples of double entry bookkeeping transactions can be found in our examples section.

Accounting Transaction Analysis November 6th, 2016Team

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