September 24, 2020

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How to identify the accounts in a business transaction

How to identify the accounts in a business transaction
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In every business transaction, there are generally two or more accounts in which financial data must be entered. Identifying these accounts might be an issue for persons who haven’t passed through rigorous accounting training. This article provides a simple method that can help you identify every account in a financial transaction.

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For you to identify an account, it is necessary to know the meaning of an account.

What is an account?

An account is a page in the ledger book or accounting software that is used to represent, in a summarized form, an item of a business transaction.

Why must you identify an account?

You may be wondering why identifying an account is necessary. Without doing so, it is difficult to enter or key-in the financial data of an entity in the accounting books.

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Also, identifying an account will enable posting in an accounting information system. Although, all accounts may have been created in the accounting software, not knowing the account to post can lead to errors.

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How to identify the accounts to post in a business transaction?

The following steps can help you identify the accounts in a business transaction. But note that, in every transaction, there must be a minimum of two accounts. This is because of the principle of double-entry.

Step One: Firstly, you must understand the transaction. Only when you have a good understanding of the transaction you can identify the accounts involved. Failure to this will result in choosing the wrong accounts.

Step two: Write out the sentence of the transaction in a book or any other paper.

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Step three: Identify the “Nouns” in the transaction. After writing down the financial transaction as a sentence, specify the Nouns in it.

Remember that Noun is a name. So, ask yourself what are the names in this transaction. If you have written the sentence correctly you will definitely identify the Nouns in it.

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And that’s all.

Illustration on how to identify a Noun in a transaction

Tiger bull is a business in the food and drinks industry. The purchase manager has ordered 2 million Naira worth of goods. A cheque has also been issued to make payment for it immediately.

Question: What are the accounts involved?

Solution

From the steps explained earlier, the first thing is to understand the transaction.

Next, write out the transaction in a sentence. From here it is: “Purchases of goods for 2 million Naira by cheque.”

From the sentence, you can bring out the Nouns in it.

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There are three Nouns in the sentence: Purchases and cheque.

A cheque is a banking term. So, you can replace cheque with “Bank.”

Therefore, we have two accounts in this transaction. “Purchases account” and “Bank account.”

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Conclusion

Identifying accounts in a business transaction is no big deal. With the above simple steps, you can identify the accounts and post the correct double entry in their ledger accounts.

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