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You first need to determine whether this transaction is a business nature transaction. An accounting also
transaction has to involve a monetary amount. So if the company signed a rental contract, there is no
accounting transaction. However, if it makes a payment under this contract, it will be an accounting
transaction because it has a monetary amount that the company will need to record. Other examples
include a purchase of equipment, sale of products, and salary payments.
Your next step is to identify which accounts the transaction will affect. For example, Ellen invested
$38,000 in cash and a used truck with a market value of $8,500 in the business in exchange for the
company’s common stock. The cash and truck invested will be assets for that business, recorded under
Cash account and Truck account. In exchange for that investment, Ellen will get common stock, so it will
also affect the Common Stock account.
Every transaction leads to a measurable change in the accounting equation. Knowing whether the
account belongs to assets, liabilities, or equity will allow you to determine whether the account will have
a debit or credit normal balance. In the example above, we already decided that two accounts will be
Asset accounts, and the Common Stock account is the Owner’s Equity type account.
A business records a transaction with an entry that has a debit and credit effect. This double-entry
procedure keeps the accounting equation in balance. So, when Ellen invested cash, the cash and truck
accounts will increase because the company will now have more money, and it now has a truck. The
Common Stock account will also increase.
Your final step would be to determine the amount of the transaction from the business records, such as
receipts, invoices, and bank statements.