Recording Transactions

• 1). Review evidence of the transaction after it occurs from the corresponding paper back up such as a bill, invoice or check.
  
  
• 2). Analyze the effects of the transaction on a company’s finances by determining whether the transaction caused an increase or decrease in specific accounts. For example, if Company X issued common stock in exchange for $5,000 cash, then this transaction increases Company X’s assets by $5,000 and increases stockholders' equity by $5,000.
  
  
• 3). Classify increases or decreases in specific accounts as debits or credits. The three types of accounts where debits represent an increase and credits represent a decrease are expenses and losses, assets and dividends paid. The four types of accounts where credits represent an increase and debits represent a decrease are liabilities, stockholders’ equity, revenues and gains and retained earnings. Since the transaction caused Company X to see an increase to its cash assets, $5,000 is debited to the cash account with an increase to stockholders' equity resulting in $5,000 credited to the stockholders' equity account.
  
  
• 4). Prepare a journal entry to reflect the results of your transactional analysis. Include the following required elements in each journal entry with separate column headings in this order: "Date," "Account," "Reference" number, if used, "Debits" and "Credits." Each title appears over its own column. Left align the date column and enter the date of the transaction under "Date." Enter the debit account title under "Account" left aligned to the column. Enter the debit dollar amount in the "Debit" column. Drop down to the next line and indent a few spaces under "Account" and the debit entry above it and enter the credit account title. Move to the "Credit" column and enter the credit amount. Beneath these account titles in the "Account" column, provide a brief explanation of the transaction. If you use a numbering system for journal entries, enter the appropriate number in the "Reference" column for both entries.
  
  

Using T-Accounts

• 1). Create a manual general ledger by designating a separate ledger page for each type of account the company uses. A company can have thousands of different accounts, however some common accounts are cash, accounts receivable, accounts payable and common stock.
  
  
• 2). Title each page of the ledger with a different account title. Bisect each page into a left column for "Debits" and a right column for "Credits" with a line under the account title. This structure is called a T-account because it resembles the letter “T.”
  
  
• 3). Post the debit and credit amounts from each journal entry into the appropriate T-accounts on the separate pages. Most transactions will use two accounts or more for each transaction. For example, Company X transfers the data from its journal entry for issuance of common stock for $5,000 cash into two separate accounts in the general ledger. On the ledger page with the T-account for cash accounts, enter the $5,000 debit under "Debit" column on the left of the account page. On the ledger page with its T-account for common stock, place the $5,000 credit in the "Credit" column. Include the transaction dates when posting journal entries to the general ledger and use the reference number to tie back to the journal entry in the general journal.
  
  
• 4). Check that every transaction recorded in the journal is accurately posted in the ledger.
  
  

Trial Balance Calculation

• 1). For each account, add all the debits together to calculate the total amount of debits, and add all the credits together to calculate the total amount of debits. Find the differences between the two final values by subtracting the smaller final value from the larger final value. This value represents the account balance. If the total debit amount is greater than the total amount of credits, then record the account balance in the specific account's debit column. If the total amount of credits is greater than the total amount of debits, then record the account balance in the specific account's credit column. Make a note of date and enter balance next to the amount. Subsequent transactions in other periods will appear below this.
  
  
• 2). Repeat this account balance calculation for each account in the general ledger.
  
  
• 3). Find the sum of every account balance recorded in the debit column and the sum of every account balance recorded in the credit column in the ledger. These two amounts represent a company's trial balance; if all transactions were accurately recorded in the journal and posted in the ledger, then the amounts will equal.
  
  
• 4). Review the journal and ledger for omissions, transposition errors, duplicate entries and misread numbers that can cause a trial balance error.