The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle.
The correct answer and explanation is :
The correct answer is a. before an entry is recorded in a journal.
Explanation:
In accounting, the process of analyzing a transaction to determine the appropriate debits and credits occurs before the entry is recorded in the journal. This is an essential part of the double-entry accounting system, which ensures that every transaction affects at least two accounts and that the accounting equation (Assets = Liabilities + Equity) remains in balance.
Step-by-step process:
- Analyzing the transaction: When a financial transaction occurs, the first step is to analyze its impact on the accounts. For example, if a business purchases inventory on credit, the inventory account (an asset) will increase, while accounts payable (a liability) will also increase. This is the phase where the appropriate debits and credits are determined.
- Determining the debit and credit: In double-entry accounting, every transaction has a debit entry and a corresponding credit entry. The total amount of debits must equal the total amount of credits. For instance, in the case of a purchase of inventory on credit, the business would debit the inventory account (increasing it) and credit accounts payable (increasing it).
- Recording the journal entry: Once the debit and credit are determined, the accountant records the transaction in the journal. This is done chronologically, and the entry includes the date, the accounts involved, the amounts, and a description of the transaction.
- Posting to the ledger: After the journal entry is made, it is posted to the appropriate accounts in the general ledger, where the individual account balances are updated.
- Trial balance and beyond: The trial balance is prepared after all journal entries have been posted to ensure that debits and credits are in balance. If they are not, there may have been an error in the earlier steps.
In summary, the debit and credit analysis of a transaction occurs before the journal entry is made, ensuring that the transaction is accurately recorded in the books.