How are Business Transactions Analyzed for Recording Purposes?
Poor cash management causes 82 percent of businesses to fail. As such, you need to record and analyze all your business transactions. Unfortunately, some business owners don’t know how to do this.
Every business checklist should include an experienced lawyer and a qualified accountant. Without them, the business will be exposed to legal and financial problems.
For example, lacking a proper accounting system exposes the business to fraud. Other negative effects include an inability to plan the budget or sort out payroll. You can also add a failure to pay for operations and inability to prepare taxes.
Due to these negative effects, it’s important to make changes before the problems arise. Keep reading to learn how to analyze transactions for recording.
Analyzing Business Transactions for Recording
Two of the six steps in the accounting cycle include recording and analyzing business transactions. The others involve preparing the financial statements and making sure they balance. Then, they close the accounts.
Here’s how those two steps work:
How to Analyze Transactions
Once several transactions occur, the accountant gathers them for analysis. The goal is to determine how these transactions affect assets, equity, and liabilities. But before you do anything, you need to sort these transactions.
For example, transactions may be about payroll, supplier payments, or money from sales. Identify what the transaction is and what account it belongs to. The accounts can be revenue, expense, or accounts receivable.
As such, proper analysis involves determining several factors. These include the date of the transaction and its purpose.
There must be documented proof of the transaction. This can be in the form of a receipt or an invoice.
You must also note the time the transaction took place. This is important in case a customer asks about a transaction they had with your business. It’s also important when creating financial reports.
The bookkeeping standard is to record the accounts debited and those credited. The simplest form is the Single-Entry bookkeeping. It involves noting the money paid and money deposited.
More advanced systems note the details of other accounts. This is the Double-Entry bookkeeping system. The records should be in chronological order of occurrence. Two entries are made for each transaction, that is the debited and the credited accounts.
Analyzing Accounts Receivable
Accounts receivable also need analysis. This is the money owed to the business despite providing goods or services to the customer. One of the best ways to analyze it is by dividing it by sales.
This provides the figures for the money the business needs to collect from customers. If the figure is high, it means the business may struggle to make collections.
As such, they will suffer from cash flow problems. Investors are therefore put off by high receivable figures.
You may also decide to have a provision for bad debts. This is recorded in the financial statements.
Again, if the bad debts are high, it means the business is not making the collections. In that case, you might consider hiring a firm skilled in business debt collections.
Learn More About Business Transactions and Commercial Law
The points above show the importance of recording and analyzing your transactions. Doing this helps track revenue growth and predicts future earnings. It also shows where you’re spending money so as to reduce unnecessary expenses.
Contact us to learn more about business transactions and commercial law.