A Business event, also called a business transaction, is an exchange of value between two different groups. The exchange is usually called an event when it impacts the accounting equation in one way or another. In other words, a business transaction or event occurs when the assets, liabilities, or owner's equity of a company is changed.
We are all familiar with transaction. For example, when you purchase groceries, you give the cashier money and you leave with a bag of groceries. Business transactions work the same way.
An event always impacts the accounting equation of a company because it is an exchange of financial statement elements for other financial statement elements.
Journal Entry Format
All accounting events are recorded in a company's accounting system as journal entries as they occur. These journal entries simply record the changes to the accounting equation based on the business transaction. Taking our grocery example above, a journal entry would be recorded to decrease the cash account by the amount paid to the cashier and increase the supplies account by the same amount.
The journal entry system is based on debits and credits to increase or decrease account balances. Every journal entry's debits and credits must balance. This is the same concept behind the accounting equation. For every dollar debited to one account in an entry, the same amount must be credited to a different account. This way the accounting equation is always in balance.
Here is an example of the journal entry format for our grocery purchase transaction.
As you can see, the supplies account is debited or increased by the event while the cash account is credited or decreased by the event. A standard journal entry always shows the date of business transaction, names of the accounts effected, amounts to be debited and credited, as well as a brief description of the event.
When you are first learning how to make journal entries it is helpful to look at how these entries affect the accounting equation. Here's a look at the same transaction's effect on the accounting equation.
As you can see, both accounts in the journal entry are asset accounts. Thus, total assets are increased from newly purchases supplies and decreased by the disbursement of cash. In other words, there is no net change to the equation. However, notice that the equation is still in balance after the transaction is made.
Since there are so many different kinds of journal entries in accounting, I just wanted to cover the basics in this article. Go to the journal entries section for examples of just about every journal entry you can think of.
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