When a business transaction occurs, it can be recorded in the books of an organization in a number of ways. The following bullet points note the most common methods available:
- Journal entries. The most basic method used to record a transaction is the journal entry, where the accountant manually enters the account numbers and debits and credits for each individual transaction. This approach is time-consuming and subject to error, and so is usually reserved for adjustments and special entries. In the following bullet points, we note the more automated approaches used in accounting software to record the more common business transactions.
- Receipt of supplier invoices. When a supplier invoice is received, the accountant logs the invoice into the accounts payable module in the accounting software. The module automatically creates a journal entry that debits the relevant expense or asset account, and credits the accounts payable liability account.
- Issuance of supplier invoice. When an invoice is to be created for a customer, the accountant enters the relevant information about the price, unit quantity, and applicable sales tax into the billing module in the accounting software. The module automatically creates a journal entry that debits either cash or the accounts receivable account, and credits the sales account. There may also be a credit to the sales tax liability account.
- Issuance of supplier payments. When suppliers are paid, the accountant checks off the invoice numbers to be paid in the accounts payable module in the accounting software. The software then prints checks or issues electronic payments, while also debiting the accounts payable account and crediting the cash account.
- Issuance of paychecks. When employees are to be paid, the accountant enters the pay rates and hours worked of all employees into the payroll module of the accounting software. The module automatically creates a journal entry that debits the compensation and payroll tax expense accounts, and credits cash. This can be quite a complex entry, since it may also address garnishments and other deductions, and separately record several types of payroll taxes.
These recordation methods all create entries in the general ledger, or else in a subsidiary ledger that then rolls into the general ledger. From there, the transactions are aggregated into the financial statements.