The analysis of accounting transactions, the recording, posting, adjusting, and reporting economic results and financial condition of a business entity is the heart of double-entry–accrual accounting.
For an accounting transaction to exist, at least one element of the balance sheet equation or the income statement elements must be created or changed. An exchange between a business entity where services are rendered or goods are sold to an external entity for cash or on credit, or where services are received or goods are purchased, creates a transaction. Following the transaction, adjusting entries must be made to adjust the operating accounts of the business entity at the end of an operating period to recognize internal accruals and deferrals. Such transactions will recognize sales revenues earned but not yet received or recorded, and expenses incurred but not yet paid or recorded. To complete the accounting period, a requirement also exists to close the temporary income statement operating accounts (sales revenue and expenses) to bring them to a zero balance and transfer net income or net loss to the capital account(s) or the retained earnings account. Note that this requirement means that an en-try is made on both sides of the equation—thus, the name double-entry ac-counting. Adjusting and closing entries will be discussed in detail later in this chapter.
Since no transaction can affect only one account, the balance sheet equation is kept in balance and the equality between both sides of the equation, A=L+OE, is maintained. Each transaction directs the change to be made to each account involved in the transaction. Each directed change will cause an increase or decrease in a stated dollar amount to a specified account. It is important to understand how a journal entry directs such changes to a specific account. This is accomplished through the use of two account columns to receive numerical values that follow the rules of debit and credit entries.