The Accounting Cycle: Step 1—Collecting and Analyzing Transactions 📊

The first, and arguably most critical, step in the accounting cycle is Collecting and Analyzing Transactions. This is where raw financial events are captured and recorded, providing the accurate data needed for every subsequent step, including preparing the Chart of Accounts and the General Ledger.

1. The Transaction Journal: The Book of Original Entry

The Transaction Journal (or simply the "Journal") is the starting point for all financial record-keeping. It is a chronological listing of every single financial event that occurs in a business.

What is the Purpose of a Journal?

The journal is the Book of Original Entry. Its primary function is to:

• List Details: Record the full details of an individual event (like a revenue or expense transaction).

• Organize Chronologically: Unlike the General Ledger, the journal organizes transactions strictly by date, making it easier to track the flow of events as they happen.

What Types of Events are Recorded?

Virtually every financial event is recorded in the transaction journal. Examples include:

• Purchase Expenses: Payments for supplies, inventory, or services.

• Revenue: Customer payments received for goods or services rendered.

• Adjustments: Non-cash entries, such as recording the depreciation of assets (like business vehicles or equipment).

What to Include in a Journal Entry?

To create a valid Journal Entry, you must record more than just the dollar amount. Essential components include: the Date, the Account(s) Affected, the corresponding Debit and Credit Amounts (for double-entry bookkeeping), a Reference Number, and a brief Description (Narration).

---

2. The Chart of Accounts: Categorizing Your Business

The Chart of Accounts (COA) is an index or master list that contains all the financial accounts used by a business to categorize transactions. It is the roadmap for organizing your financial life.

Chart of Accounts Overview

• Categorization: The COA lists all accounts and sub-accounts (e.g., Assets, Liabilities, Equity, Revenue, Expenses).

• Organization: It organizes and categorizes a business's financial information into a logical structure.

• Customization: Businesses can customize the account types and assign unique Account Numbers to each one, which helps streamline the posting process.

---

3. The General Ledger: Organizing by Account

The General Ledger (GL) is the final destination for all posted journal entries. It is the complete record of all financial transactions in a business, organized by account.

General Ledger Overview

The General Ledger serves a critical function by providing detailed account balances:

• Organization: Unlike the journal (organized by date), the GL groups all similar transactions together by Account Type (e.g., all Cash transactions are together, all Rent Expense transactions are together).

• Balances: It shows the running balance for each individual account. This detailed level of information is crucial for analysis.

• Financial Reporting: The final balances from the General Ledger are used directly to prepare the major financial reports, such as the Income Statement and the Balance Sheet.

Key Distinction: The Transaction Journal is chronological and records when the event happened. The General Ledger is organized by account and records what the event ultimately affected and the current running balance.