What Is the First Step of the Accounting Process?

The accounting process serves as a systematic framework businesses use to track their financial activities. It provides a structured approach to capturing every financial event, ensuring that a company’s economic health is accurately reflected. Understanding the initial step in this process is foundational, as it establishes the precision and reliability of all subsequent financial records.

Identifying and Analyzing Business Transactions

The first action in the accounting process involves identifying and analyzing business transactions. A business transaction is defined as any economic event that directly impacts the financial position of a business and can be reliably measured in monetary terms. This includes events like selling products, purchasing supplies, paying employees, or receiving payments from customers.

Once an event is identified as a business transaction, the next step is to analyze its financial impact. This analysis involves determining which specific accounts are affected, such as assets, liabilities, equity, revenues, or expenses. For instance, when a business buys equipment, the asset account “Equipment” increases, and if paid with cash, the asset account “Cash” decreases.

Every transaction must maintain the fundamental accounting equation, which states that Assets equal Liabilities plus Equity. For example, if cash is received for services, both the “Cash” asset account and a “Revenue” equity account increase, keeping the equation balanced. This early analysis ensures that the financial effects of an event are correctly understood before any formal recording takes place.

Gathering Supporting Documents

After identifying and analyzing a business transaction, the next step is to gather the necessary supporting documents. These documents, often referred to as source documents, provide objective evidence that a transaction actually occurred. Examples include sales invoices for customer purchases, purchase receipts for business expenditures, bank statements detailing cash flows, payroll records for employee compensation, and utility bills for operational expenses.

These source documents are essential because they verify the specific details of a transaction, such as the date it took place, the exact monetary amount involved, and the parties engaged in the exchange. For instance, a sales invoice confirms the revenue earned and the amount owed by a customer, while a vendor invoice verifies the cost of goods or services acquired. The Internal Revenue Service (IRS) generally requires businesses to retain records, including supporting documents, for a period that could extend up to seven years, depending on the nature of the document and transaction, to support income and deductions.

Maintaining a comprehensive collection of these documents is not only a regulatory expectation but also a sound business practice. They serve as the verifiable basis for all entries made into the accounting system, enabling auditors to trace recorded transactions back to their origin. This documentation ensures accuracy and provides a clear audit trail, which is crucial for financial transparency and compliance.

Recording in the General Journal

The first formal procedural step in the accounting process is recording the analyzed transaction in the general journal. The general journal serves as the chronological record of all business transactions as they occur. It is often referred to as the “book of original entry” because it is where transactions are initially entered into the accounting system.

A typical journal entry includes several specific components to ensure clarity and completeness. These components usually consist of the date of the transaction, the names of the accounts involved, and the monetary amounts for both debits and credits. A brief, clear description of the transaction is also included, explaining the nature of the economic event. For example, a journal entry for a cash sale would specify the date, debit the Cash account, credit the Sales Revenue account, and briefly note “Cash sale of merchandise.”

This recording adheres to the fundamental principle of double-entry accounting, which mandates that every transaction affects at least two accounts. One account receives a debit, and at least one other account receives a credit, with the total debits always equaling the total credits for each transaction. This inherent balance provides a self-checking mechanism within the accounting system, helping to prevent errors. The general journal, therefore, systematically captures the financial impact of each event before information is transferred to more detailed ledger accounts.