# Recording Transactions

Business I · Accounting I · https://tryals.app/learn/business-i/recording-transactions

## The Grammar of Commerce

Every journal entry answers three questions: what happened, which accounts move, and by how much. Master ten patterns and you can record a hundred business events.

**Accrual Principle**: $\text{Record when earned or incurred, not when cash moves.}$ Cash-basis waits for the bank; accrual-basis tells what really happened.

| Event | Debit | Credit |
| --- | --- | --- |
| **Cash sale** | Cash | Sales revenue |
| **Credit sale** | Accts Receivable | Sales revenue |
| **Buy inventory** | Inventory | Accts Payable |
| **Pay supplier** | Accts Payable | Cash |
| **Collect cash** | Cash | Accts Receivable |

## Transactions & Depreciation

Continuing our core patterns, expenses and equity entries follow the exact same logic of balanced debits and credits.

| Event | Debit | Credit |
| --- | --- | --- |
| **Pay wages** | Wage expense | Cash |
| **Owner investment**| Cash | Share capital |
| **Take a loan** | Cash | Loan payable |
| **Depreciation** | Depr. expense | Accum. depr. |
| **Pay dividend** | Retained earnings | Cash |

**Depreciation**: Dr Depreciation Expense, Cr Accumulated Depreciation. No cash moves; it allocates an asset's cost over its useful life, reducing book value and profit.

## Practice questions

8 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. Which transactions involve NO cash movement?

A. Recording monthly depreciation
B. A credit sale to a customer
C. Paying wages in cash
D. Purchasing inventory on credit

**Answer:** A. Recording monthly depreciation; B. A credit sale to a customer; D. Purchasing inventory on credit

**Why:** Depreciation, credit sales, and credit purchases all happen without cash changing hands. Only paying wages actually moves cash, the rest create receivables, payables, or allocations.

Page: https://tryals.app/practice/business-i/recording-transactions/which-transactions-involve-no-cash-movement

### 2. Under the accrual principle, an expense is recorded when the cash is actually paid.

**Answer:** False

**Why:** False. Accrual records an expense when it is **incurred**, when the obligation arises, regardless of when cash moves. That is what makes profit differ from cash flow, and why a profitable company can still fail: the matching principle puts the expense in the period whose revenue it helped produce.

Page: https://tryals.app/practice/business-i/recording-transactions/under-the-accrual-principle-an-expense-is-recorded-when-the-cash-is

### 3. Recording depreciation debits an expense but no cash moves. Why is it recorded at all?

A. Because tax law requires a deduction each year
B. Because cash will eventually be spent replacing the asset
C. Because the cost is consumed to produce this period's revenue
D. Because the asset’s market value has fallen by that amount

**Answer:** C. Because the cost is consumed to produce this period's revenue

**Why:** Accrual accounting reports consumption, not payment. This is also why profit and cash flow differ, and why depreciation is added back in a cash-flow statement.

Page: https://tryals.app/practice/business-i/recording-transactions/recording-depreciation-debits-an-expense-but-no-cash-moves-why-is-it

### 4. A firm makes credit sales of 50,000 in Q1. Customers pay 35,000 by quarter-end. **Estimate the Accounts Receivable balance** at quarter-end.

**Answer:** 15000 (within ±1000)

**Why:** $50{,}000 - 35{,}000 = 15{,}000$ still outstanding. The receivable is the gap between accrual revenue (all 50k) and cash collected (35k).

Page: https://tryals.app/practice/business-i/recording-transactions/a-firm-makes-credit-sales-of-50-000-in-q1-customers-pay-35-000-by

### 5. Cash-basis or accrual-basis? When is revenue recognized?

**Answer:**

- Cash basis: Revenue recorded when the customer pays, Expense recorded only when the cheque clears
- Accrual basis: Revenue recorded when goods are delivered, Expense recorded when the bill arrives from the supplier

**Why:** Accrual = when it happens; cash = when money moves. Published financial statements use accrual because it matches effort to reward within the period.

Page: https://tryals.app/practice/business-i/recording-transactions/cash-basis-or-accrual-basis-when-is-revenue-recognized

### 6. Match each transaction to its cash effect.

**Answer:**

- Credit sale → No cash moves, only a receivable and revenue
- Collection from customer → Cash in, receivable down
- Depreciation → No cash moves at all, a non-cash expense
- Dividend payment → Cash out, equity down

**Why:** Two of these four events touch no cash, the accrual system records them anyway because they are real economic events.

Page: https://tryals.app/practice/business-i/recording-transactions/match-each-transaction-to-its-cash-effect

### 7. A firm can be profitable and run out of cash in the same quarter. Which accounting convention makes that possible?

A. The matching principle, which delays recording expenses
B. Depreciation, which reduces profit without reducing cash
C. Accrual accounting: revenue is recognised when earned
D. It is not possible; profitable firms always have positive cash flow

**Answer:** C. Accrual accounting: revenue is recognised when earned

**Why:** Profit measures earning and cash measures collecting, and accrual accounting deliberately separates them, which is why fast growth is a common cause of insolvency. Depreciation moves the two apart in the opposite direction, adding to cash relative to profit, so option 2 has the sign backwards.

Page: https://tryals.app/practice/business-i/recording-transactions/a-firm-can-be-profitable-and-run-out-of-cash-in-the-same-quarter

### 8. A company delivers consulting services in December but the client pays in January. Under accrual accounting, when is revenue recognized?

A. December, when the service was delivered
B. January, when cash was received
C. Whichever month the manager prefers
D. Split equally across both months

**Answer:** A. December, when the service was delivered

**Why:** Accrual records revenue when earned, the service was delivered in December, so December gets the revenue. January only records the cash collection (Dr Cash, Cr Receivable).

Page: https://tryals.app/practice/business-i/recording-transactions/a-company-delivers-consulting-services-in-december-but-the-client