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Although the means and specific procedures regarding how the bookkeeping process is carried out vary from business to business, all businesses walk through the following steps during the accounting period. These basic four steps take up most of the time spent on recordkeeping:

1 Prepare original source documents or electronic references for all transactions, operations, and other events of the business.When buying products, a business gets a purchase invoice (or its electronic equivalent) from the supplier. When borrowing money from the bank, a business signs a note payable, a copy of which the business keeps. When a customer uses a credit card to buy a retailer’s product, the business gets the credit card receipt (or an electronic alternative) as evidence of the transaction. When preparing payroll, a business depends on salary rosters and time tracking systems. All these key business forms serve as sources of information for the bookkeeping system — in other words, information the bookkeeper uses in recording the financial effects of the activities of the business.

2 Determine the financial effects of the transactions, operations, and other events of the business.The activities of the business have financial effects that must be recorded: The business is better off, worse off, or at least “different off” as the result of its transactions. Examples of typical business transactions include paying employees, making sales to customers, borrowing money from the bank, and buying products that will be sold to customers. The bookkeeping process begins by determining the relevant information about each transaction. The chief accountant (controller) of the business establishes the rules and methods for measuring the financial effects of transactions. Of course, the bookkeeper should comply with these rules and methods.

3 Make original entries of financial effects in journals, with appropriate references to source documents.Using source documents or electronic files, the bookkeeper makes the first, or original, entry for every transaction into a journal; this information is later recorded in accounts (see the next step). A journal is a chronological record of transactions in the order in which they occur — like a very detailed personal diary.Here’s a simple example that illustrates recording a transaction in a journal: A retail bookstore, expecting a big demand from its customers, purchases, on credit, 100 copies of Accounting For Dummies, 7th Edition, from the publisher, Wiley. The books are received and placed on the shelves. (One hundred copies is a lot to put on the shelves, but our relatives promised to rush down and buy several copies each.) The bookstore now owns the books and also owes Wiley $1,500, which is the cost of the 100 copies. Here we look only at recording the purchase of the books, not recording subsequent sales of the books and paying the bill to Wiley.The bookstore has established a specific inventory asset account called “Inventory–Trade Paperbacks” for books like this one. And the purchase liability to the publisher should be entered in the account “Accounts Payable–Publishers.” Therefore, the original journal entry for this purchase records an increase in the inventory asset account of $1,500 and an increase in the liability accounts payable of $1,500. Notice the balance in the two sides of the transaction: An asset increases $1,500 on the one side, and a liability increases $1,500 on the other side. All is well (assuming there are no mistakes).In ancient days, bookkeepers had to record journal entries by hand, and even today there’s nothing wrong with a good hand-entry (manual) bookkeeping system. But bookkeepers now can use online, real-time computer systems that take over many of the tedious chores of bookkeeping (see Chapter 4). Unfortunately, so much keyboard typing has replaced hand cramps with carpal tunnel syndrome for some bookkeepers, but at least the work gets done more quickly and with fewer errors!Summing up, a journal entry records the whole transaction in one place at one time. All changes caused by the transaction are chronicled in one entry. However, making journal entries does not provide a running balance for the individual assets, liabilities, and other financial components of a business (or other entity) — which leads to the next step in the bookkeeping process.

4 Post the financial effects of transactions in the accounts changed by the transactions.Journal entries are the sources for recording changes caused by transactions in the accounts of the entity. An account is a separate record or file for each asset, each liability, and so on. The pluses and minuses of the transaction are recorded in the accounts changed by the transaction. In this way, a running balance is kept for each. Recording the effects of transactions from journal entries to accounts is called posting.Think of each account as an address. The changes recorded in the original journal entries are “delivered,” or posted to the accounts. A business (or other entity) establishes an official chart, or list of accounts, that is used for posting transactions. The original journal entry records the whole transaction in one place; then, in the second step called posting, each change is recorded in the separate accounts affected by the transaction. We can’t exaggerate the importance of entering transaction data correctly and in a timely manner — both in original journal entries and in the posting step. The prevalence of data-entry errors is one important reason that most retailers use cash registers that read bar-coded information on products; this approach more accurately captures the necessary information and speeds up the entry of the information. One way of stressing this point is the well-known data-processing expression “garbage in, garbage out.”