Business and Personal Finance: The Everyday Transactions

Setting Up a System – The Everyday Transactions

Most companies have the same types of day-to-day transactions, and almost all of these involve revenue and expense accounts. Each of these common transactions involves some kind of document, whether it’s an invoice, a receipt, a check stub, or some cash register tape. From these source documents, you can record your company’s transactions in the journals.

Following, you’ll see a glimpse of a typical day’s transactions for a small retail business. For each transaction, the standard source document is clearly identified, along with instructions for recording the journal entry. Because this company has inventory, it uses the accrual method of accounting, which includes the following transactions.

  1. Accept inventory delivery of twenty umbrellas at $5.00 each, purchased on account from Bella’s Umbrellas.
  2. Write check number 126 for $178.00 to Union Electric to pay utility invoice in full.
  3. Write check number 127 for $550.00 to Rain Gear, Inc., to pay for last month’s delivery of galoshes.
  4. Write check number 128 for $68.66 to Verizon for phone service.
  5. Buy lunch for $7.65 in cash.
  6. Buy stamps for $39.00 in cash.
  7. Write up deposit slips for $130.00 in cash, $167.50 in checks, and $233.50 in Visa and MasterCard receipts for the day’s sales, including $26.54 in sales tax.

The source document for the first transaction is the invoice that comes with the delivery. This transaction is recorded in the purchases journal, with a $100 debit to inventory purchases and a $100 credit to accounts pay- able. The accounts payable portion must include the name of the vendor. For transactions two through four, the source documents include both the invoices paid and the check stubs (or the check register). All are recorded in the cash payments journal, as each includes a credit to cash. In transaction three, the debit is utilities expense. In transaction four, the debit is to accounts payable, with a notation of the vendor name. For transaction five, the debit is to telephone expense.

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The next transaction, number five, is a trick: your lunch does not count as a business expense. If you used company cash, you have to debit owner withdrawals and credit cash in the cash payments journal; if you used your own pocket money, no entry is needed. The source document for transaction six is the receipt from the post office. The debit side of the journal entry is postage expense, but the credit depends on which cash you used. If it was your pocket money, that counts as an owner contribution, and the credit is to your equity account; record this in the general journal. If it was the company’s cash, credit the appropriate cash account using the cash payments journal. Finally, the source document for transaction seven is the deposit slip. This entry goes in the cash receipts journal, with a debit to cash and a credit to sales.

ALERT!

Be aware that paying business expenses with personal money, or vice versa, can spell trouble when your business structure is a corporation or LLC. Mixing funds like that can invalidate your business structure and cause quite a legal mess. Instead, take the extra step of writing a check to the business, then using those funds for whatever the company needs.