Recording accounting transactions for your small business: Simple steps and examples

Published Wednesday 26 November 2025

Table of contents

• What is recording in accounting?
• Why record-keeping matters
• Recording in cash accounting vs accrual accounting
• Types of business transactions you need to record
• How to record transactions in accounting
• Basic rules for recording transactions
• Simple journal entry examples
• Is that all?
• How long do you keep accounting records?
• Using accountants and bookkeepers
• Keep your business finances simple with Xero
• FAQs on recording accounting transactions

Key takeaways

• Establish a dedicated business bank account and link it to accounting software to automatically capture transactions and eliminate manual data entry errors.

• Categorise all transactions using a proper chart of accounts with clear income categories (sales revenue, investment income) and expense categories (cost of goods sold, operating expenses, administrative costs) to enable accurate financial reporting.

• Apply the appropriate accounting method consistently—record transactions when money changes hands for cash accounting, or when invoices are sent/received for accrual accounting—to ensure compliance with your chosen system.

• Retain all accounting records and supporting documents for at least five years to meet Australian Taxation Office requirements and protect your business during audits.

What is recording in accounting?

Recording in accounting is the process of systematically documenting all your business's financial transactions in your accounting system. This creates a complete record of money flowing in and out of your business.

You'll record transactions like:

• Sales and revenue: Money coming in from customers
• Business expenses: Money going out for operations
• Loans and investments: Capital movements that affect your business

Why record-keeping matters

Good record-keeping gives you a clear view of your finances. It helps you compare your results year on year. Accounting standards require you to present at least one set of comparative financial statements. You'll understand:

• Profitability: Whether you're making money or losing it
• Cash flow: Who owes you money and what you owe others
• Financial health: If you can meet upcoming obligations. This helps you check if your business can keep running for at least the next 12 months.
• Business value: What your company is actually worth

Keeping accurate records helps you file correct tax returns and avoid issues with audits.

Recording in cash accounting vs accrual accounting

Transaction timing depends on your accounting method:

: Record transactions only when money actually changes hands

• Record invoices only when you receive payment
• Record bills only when you pay them

: Record transactions when invoices are sent or received

• Record sales when you invoice customers (even if unpaid)
• Record expenses when bills arrive (even if you haven't paid them)

Types of business transactions you need to record

Common transactions you need to record include:

• Sales made to customers (revenue)
• Purchases of stock or supplies (expenses)
• Payments for rent, utilities, or software subscriptions
• Wages and salaries paid to employees
• Loan repayments to a bank
• Cash invested into the business by an owner

Keeping track of all these types helps you see exactly where your money is coming from and where it's going.

How to record transactions in accounting

Here ate steps to record transactions in accounting.

1. Capture transactions

Separate business banking simplifies transaction capture:

• Step 1: Open a dedicated business bank account to avoid mixing personal and business expenses
• Step 2: Use this account for all business transactions so your bank statement becomes your transaction record
• Step 3:Automate the process by linking your bank account to accounting software - transactions flow through automatically, reducing manual data entry

You can even connect your bank account to your accounting software so the data flows through automatically.

Recording invoices and bills at time of issue

If you use accrual accounting, you'll want to record purchase invoices as soon as they come in and sales invoices as soon as they go out. Obviously those transactions won't be reflected in your bank account until they're paid, so in the meantime you can either enter them manually or sidestep that admin by using your accounting software for invoicing and bill processing.

That way amounts, dates, taxes, and customer and vendor information are automatically recorded in the software at time of issue.

Getting info from paper receipts

If you pay an expense with cash or a personal card, photograph the receipt with your phone. You can punch the info into your accounting records later or you can use an integrated OCR (optical character recognition) app, which scans the picture to find the transaction data and enters it into your software for you.

Pulling records from online shops or POS systems

You may be able to get detailed sales data from point-of-sale (POS) or ecommerce systems. For example, some software can help link transaction fees or courier costs to specific transactions which can be handy for working out the true cost of sales. Again, you can hook software like that into an online accounting package to pull that information together.

Entering expenses from other bank accounts

If employees use a personal card for a business expense, you can reimburse them from your business account and capture the transaction that way. Don't forget to secure a copy of the receipt. If your employees often claim expenses, an expense app can capture receipts, send claims and automate accounting entries.

2. Categorise your transactions

Transaction categorisation organises your financial data into meaningful groups using your chart of accounts.

Common income categories:

• Sales revenue: Money from customers
• Investment income: Interest from business accounts
• Other income: Miscellaneous earnings

Common expense categories:

• cost of goods sold (COGS): direct costs to make your product
• Operating expenses: Utilities, advertising, consulting
• Administrative costs: Office supplies, software subscriptions

Proper categorisation helps classify transactions as income, expenses, liabilities, or assets - essential for accurate financial reporting.

Involve an accountant or bookkeeper when setting up your chart of accounts, as your choices affect how you analyse your income and spending.

3. Get help with things like depreciation and loans

Income and expenses that flow in and out of your bank account are generally straightforward. But recording capital assets, depreciation and loans are a little more tricky.

Assets like vehicles, equipment, and commercial buildings are recorded as fixed assets. These assets are depreciated each year to reflect that they're losing value, and the depreciation can be claimed off taxes. There are many rules for recording depreciation, so it’s best to get professional help to stay compliant.

Meanwhile, loan repayments need to be split into a principal component and an interest component – with each part recorded to different accounts. Owner's contributions and withdrawals also need to be properly documented.

If you need help, find an accountant, bookkeeper or tax professional in the Xero advisor directory.

4. Check your numbers

Bank fees can also cause differences, so check for these when you review your records.

Again, accounting software streamlines this because it automatically copies the numbers from your bank account, which reduces the risk of transcription errors. It then prompts you to reconcile transactions – showing matches between bank transactions and accounting entries so you can confirm everything's present and correct.

5. Create financial statements

You record transactions so you can create financial statements, which must be presented at least annually under Australian Accounting Standards. If you've got all the numbers correctly entered and categorised, you can create accurate:

• profit and loss statements to show if you are making money
• balance sheets to show your business’s net worth
• cash flow statements to show how you create and use cash

Basic rules for recording transactions

Accounting has a core rule called double-entry bookkeeping. Every transaction affects at least two accounts. For every debit in one account, there's an equal credit in another. This keeps your books balanced.

For example, when you buy office supplies with cash, your 'Office Supplies' expense account increases (a debit), and your 'Cash' account decreases (a credit).

You do not need to handle the mechanics yourself – accounting software manages this for you. Accounting software like Xero handles the debits and credits for you automatically in the background. Your main job is to make sure you have the original documents, like receipts and invoices, to back up each transaction.

Simple journal entry examples

A journal entry is the official name for a recorded transaction. While software creates them for you, it helps to understand what's happening behind the scenes.

• Example 1: You sell a product for $100 cash. Your 'Cash' account increases by $100, and your 'Sales Revenue' account also increases by $100. This shows you have more cash and have earned more revenue.
• Example 2: You pay your monthly $500 rent. Your 'Rent Expense' account increases by $500, and your 'Cash' account decreases by $500. This shows you've incurred an expense and have less cash as a result.

In both cases, the books stay balanced. Xero creates these entries for you when you reconcile your bank transactions or create an invoice.

Is that all?

Modern accounting software handles the technical complexity automatically. Traditional bookkeeping required manual journal entries and ledger transfers, but today's software manages these processes behind the scenes.

You'll still see references to journal entries in accounting - these are simply the individual records of each transaction. Your software creates them automatically when you enter transaction details.

How long do you keep accounting records?

You must keep your records to meet tax requirements.

The Australian Taxation Office (ATO) states you need to keep most records for five years.

Required documents:

• digital records in your accounting system
• supporting documents such as bank statements, receipts, invoices and contracts
• backup copies stored securely in case of system failure or audit

Check your local tax authority's specific requirements for exact retention periods in your area.

Using accountants and bookkeepers

Professional support ensures accuracy even when you understand the basics.

Why use professionals:

• spot and fix mistakes quickly
• stay current with tax law changes
• save you time so you can focus on your business
• give you confidence your records are accurate

Find a qualified accountant or bookkeeper in the Xero advisor directory.

Keep your business finances simple with Xero

Recording accounting transactions doesn't have to be a chore that takes you away from your real work. With smart tools, you can automate most of the process and get a real-time view of your business performance. Xero simplifies everything from capturing receipts and connecting to your bank to creating financial reports, so you can focus on what you do best.

Ready to run your business, not your books? Try Xero accounting software for free.

FAQs on recording accounting transactions

Here are answers to a few common questions about recording transactions.

What is the journal entry for a transaction?

A journal entry is how a transaction is formally recorded in accounting. It always involves at least one debit and one credit to different accounts to keep the books balanced. For example, paying a bill would debit an expense account and credit your cash account.

What are the different types of journal entries?

There are several types. Opening entries start your books. Adjusting entries correct records at the end of a period. Closing entries reset revenue and expense accounts. Most small business owners using software do not need to handle these manually.

Do I need to be an accountant to record transactions?

No. Modern accounting software like Xero is designed for business owners, not just accountants. Features like automatic bank feeds and simple reconciliation make it easy for anyone to keep accurate records. Always consult a professional for advice and to check your work.