Starts the flow of money → banking, investing of money
Business transactions are the starting point of financial transactions.
Think of the financial system as a river. Business transactions (like sales, purchases, investments) are the rainfall that starts the river's flow. Once a transaction occurs (someone buys something, a company takes a loan), the “water” (money) starts moving. The purpose of accounting is to track that flow so we know where it came from and where it goes.
🔷 From Transaction to Statement – the 5 steps
Find transactions in source documents – These are like receipts and evidence: invoices, bank statements, etc.
Use accounting equation to study transactions
Assets = Liabilities + Equity
Think of this as the balance scale of the business. Any transaction tips this scale and must be rebalanced.
Record related transactions in journal – This is the diary of the business—chronological order.
Post journal entries to the General Ledger – The ledger is like a library where each book is an account (Cash, Inventory, Revenue, etc.). Entries from the journal are sorted into these books.
Create and examine Financial Statements and a trial balance – Now you summarize everything to show outsiders what’s going on financially.
đź”· Source Documents
"The original records that explain financial transactions entering the accounting system."
Examples:
Bills from suppliers
Purchase orders
Sales receipts
Payroll records
Checks
Bank statements
These are like the receipts and tickets for a train ride — each ticket shows where you got on, where you’re going, and what you paid. They justify the trip (i.e., the transaction) and prove it happened.
đź”· The Accounts Underlying Financial Statements
🟨 Accounts
Shows increase/decrease in asset, liability, equity, revenue, or expense.
Each account is like a bucket that collects changes of a specific type. The “Cash” bucket gets money when you receive it and loses money when you spend it.
🟨 General Ledger
Shows every account and their balances.
The ledger is the master spreadsheet of all the buckets, showing how full or empty each one is.
đź”· Chart of Accounts Diagram
This is like a map of the buckets — it organizes them into major categories so you know where everything goes.
Asset Accounts
Liability Accounts
Equity Accounts
Revenue
Expenses
Stock
Dividends
đź”· Capital Equity
Equity Increases:
Revenue
Stock
Equity Decreases:
Expenses
Dividends
Think of equity as the value that belongs to the owner. When you earn revenue or issue stock, the business is worth more → equity goes up.
When you pay expenses or dividends, you're giving away value → equity goes down.