The previous article explained the double entry system. We now begin working formally through everyday transactions, recording their effects in T-accounts.
Cash transactions
We start with cash transactions — transactions settled purely with cash in hand or cash at bank. This is the type of transaction a company encounters most in its early days.
1. Contribution of fundsWhen a company first opens, the owner usually puts in an initial investment in one go — most commonly cash in hand or cash at bank, since money offers the most flexibility: cash or cheques can then be used to acquire the company's other assets.
Analysis:
- Asset increases <Debit: Cash or Bank account>
- Capital increases <Credit: Capital account>
Of course, if the owner contributes other assets — a car, say — the record becomes:
- Asset increases <Debit: Motor vehicle account>
- Capital increases <Credit: Capital account>
2. Loan from a third partyBesides the owner's contributions, the other most common source of funds is borrowing from creditors — typically banks, or the owner's relatives and friends.
Analysis:
- Asset increases <Debit: Cash or Bank account>
- Liability increases <Credit: Loan from creditor account>
3. Purchasing other assets in cashOnce the company has enough initial investment, it usually buys the assets it needs with cash or cheques — for example (a) computers for office staff, (b) machines to make products, (c) vehicles to deliver goods.
(a) Analysis:
- Asset increases <Debit: Office equipment account>
- Asset decreases <Credit: Cash or Bank account>
(b) Analysis:
- Asset increases <Debit: Machinery account>
- Asset decreases <Credit: Cash or Bank account>
(c) Analysis:
- Asset increases <Debit: Motor vehicle account>
- Asset decreases <Credit: Cash or Bank account>
Notice that when we buy assets with cash or cheque, one asset increases while another decreases correspondingly — total assets remain unchanged.
4. Purchasing goods in cashCompanies in their early days generally buy goods with cash or cheque — mainly because a newly opened company usually cannot obtain credit from suppliers, and must settle immediately in cash.
Analysis:
- Expense increases <Debit: Purchases account>
- Asset decreases <Credit: Cash or Bank account>
Worth noting: the HKDSE currently uses the periodic inventory system, meaning we do not record the effect of daily transactions on Inventory; instead, a Purchases account shows the total goods bought during an accounting period. The periodic system suits high-volume, low-value goods — it avoids updating inventory records every time goods move in or out, and assumes any goods not counted at period end have been sold.
5. Selling goods in cashOnce we have bought enough goods, the company sells them for cash. The advantage of cash sales is faster cash turnover, improving liquidity to support the young business.
Analysis:
- Asset increases <Debit: Cash or Bank account>
- Revenue increases <Credit: Sales account>
That covers several basic cash transactions. Next time, we will make our first attempts at recording these transactions in T-accounts.
In this fifth article we met some simple accounting transactions. With cash transactions covered, later articles will move on to credit transactions. Follow our blog and relearn what accounting really is.
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