How to record accounting transactions for your small business

Published Friday 5 December 2025

Table of contents

• What is recording in accounting?
• Why record-keeping matters
• Recording in cash accounting vs accrual accounting
• Basic rules for recording transactions
• How to record transactions in accounting
• Examples of recorded transactions
• Get help with things like depreciation and loans
• Check your numbers
• Create financial statements
• Streamline your transaction recording
• How long do you keep accounting records?
• Using accountants and bookkeepers
• Streamline your transaction recording
• FAQs on recording accounting transactions
• Using accountants and bookkeepers
• FAQs on recording accounting transactions

Key takeaways

• Establish a dedicated business bank account and link it to your accounting software to automatically capture transactions and avoid mixing personal and business expenses.

• Categorize every transaction into appropriate accounting categories such as sales revenue, cost of goods sold, and operating expenses to ensure accurate financial reporting and tax compliance.

• Implement regular reconciliation by comparing your accounting records with bank statements to identify timing differences, missing transactions, and bank fees that need recording.

• Seek professional help from accountants or bookkeepers for complex transactions like depreciation, loan payments, and capital assets to ensure compliance with tax rules and accounting standards.

What is recording in accounting?

Recording in accounting is the process of documenting all financial transactions in your business's accounting system. This includes tracking money flowing in and out of your business through:

• sales revenue – money you receive from customers
• business expenses – money you spend on operations
• loans and investments – capital transactions that affect your business

Why record-keeping matters

Recording business transactions helps you understand your financial position by tracking:

• Profitability: Whether you're making money or losing it
• Outstanding debts: Who owes you money and who you owe
• Cash flow capacity: Whether you can meet upcoming financial obligations
• Business value: What your business is worth overall

The records are also used to work out your taxes. If you record transactions accurately, you can file correct tax returns and feel more confident if your records are reviewed.

Recording in cash accounting vs accrual accounting

Transaction timing depends on your accounting method:

• Cash accounting: Record transactions only when money actually changes hands.
• Accrual accounting: Record income and expenses when invoices are sent or received, regardless of payment timing.

Learn more in the guide Cash vs accrual accounting.

Basic rules for recording transactions

While accounting software handles the complex debits and credits for you, it's helpful to understand the basic principles. Think of them as the three golden rules of accounting:

• Debit the receiver, credit the giver. When your business receives something (like cash from a sale), the receiving account is debited. When it gives something away (like paying a bill), the giving account is credited.
• Debit what comes in, credit what goes out. This applies to assets and expenses. If you buy a new laptop (an asset), you debit your asset account. When you pay for it, you credit your bank account.
• Debit expenses and losses, credit income and gains. All your expenses (like rent or marketing costs) are debited. All your income (like sales revenue) is credited.

Getting these rules right is key to keeping your books balanced. Luckily, Xero automates this process so you can record transactions without worrying about the technical details.

How to record transactions in accounting

Follow these steps to learn how to effectively record accounting transactions.

1. Capture transactions

A dedicated business bank account simplifies transaction recording by separating business and personal expenses.

This approach offers clear benefits:

• your bank statement reflects all business transactions
• you avoid mixing personal and business expenses
• copying transactions to your accounting records becomes straightforward

You can even link online accounting software to your bank account 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, ensuring it shows the vendor's business number for purchases of $100 or more if they are a GST/HST registrant. 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 e-commerce 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 employees claim expenses a lot in your business, an expense app on their phone can simultaneously capture the receipt, send the reimbursement claim, and automate the accounting entry.

2. Categorize your transactions

Categorizing transactions means sorting each entry into the appropriate accounting category. Common categories include:

Income categories:

• Sales revenue: Money received from customers
• Investment income: Interest earned on business accounts

Expense categories:

• Cost of goods sold (COGS): Direct costs of products or services
• Operating expenses: Utilities, advertising, consulting, and similar costs

The categories (also known as a chart of accounts) are really important because they classify transactions as income, expenses, liabilities, or assets, following official standards and guidance from bodies like CPA Canada that vary based on entity type.

Accounting software often comes with a default chart of accounts that you can use, or you can create your own. It may be a good idea to involve an accountant or bookkeeper in setting up your chart of accounts, as your choices will affect your ability to analyze your business's income and spending.

Examples of recorded transactions

Let's look at a simple example. Imagine you sell a handmade candle for $20 cash.

• What happens? Your cash increases by $20, and your sales revenue also increases by $20. In your records, this keeps everything in balance.

Now, let's say you buy $50 worth of wax from a supplier on credit.

• What happens? Your inventory (an asset) increases by $50. At the same time, you create a liability (called accounts payable) of $50, because you now owe that money to your supplier.

Each transaction has two sides, ensuring your books always reflect the true financial position of your business.

Get help with things like depreciation and loans

Simple transactions like regular income and expenses are straightforward to record. Complex transactions require professional help because they involve:

• Capital assets: Equipment, vehicles, and buildings with multi-year value
• Depreciation: Annual value decreases that affect taxes
• Loan transactions: Principal and interest components recorded separately

Assets like vehicles, equipment, and commercial buildings are recorded as fixed assets, and according to the CRA, records related to long-term property acquisitions must be kept indefinitely. You depreciate these assets each year to reflect that they are losing value, and you can usually claim the depreciation as a tax deduction. Because there is a detailed set of rules for depreciation, it is worth getting a professional to help you 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 don't have one already, you can find accountants, bookkeepers and tax professionals to help in Xero's advisor directory.

Check your numbers

Reconciliation means verifying that your accounting records match your bank statement. Common reasons for discrepancies include:

• Timing differences: Transactions recorded but not yet cleared
• Cash transactions: Payments made outside your bank account
• Bank fees: Charges that haven't been recorded yet

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.

Create financial statements

are the end goal of recording transactions. Accurate transaction recording enables you to create:

• Income statements: Show whether you're making money or losing it
• Balance sheets: Display what your business owns versus what it owes
• Cash flow statements: Track how cash was generated and used

Streamline your transaction recording

Accurately recording your transactions is the foundation of good financial management. It gives you the clarity to make confident decisions, the data to grow your business, and the peace of mind that comes with being organized. By using smart tools to automate the process, you can spend less time on your books and more time doing what you love.

Ready to make recording transactions easy? Start a free trial of Xero today and see how simple your bookkeeping can be.

Using accountants and bookkeepers

Learning how to record business transactions will help you stay on top of your business's financials, but even if you understand the basics, it's still worth having a bookkeeper or accountant check your work.

Professional bookkeepers and accountants do this work every day. They can quickly spot and correct errors in your records. Looking for the peace of mind of professional support? Then, check out our accountant and bookkeeper directory.

FAQs on recording accounting transactions

Here are answers to some common questions about recording accounting transactions.

What are the golden rules for recording accounting transactions?

The three golden rules are:

• debit the receiver, credit the giver
• debit what comes in, credit what goes out
• debit all expenses and losses, and credit all income and gains These principles ensure your books are always balanced.

What's an example of a transaction record in accounting?

A simple example is a sales record. It would include the date of the sale, the customer's name, the product or service sold, the amount, and the payment status. For a purchase, it would include the item bought, its cost, the supplier, and the date.

What are the main types of accounting records I need to maintain?

The five key accounting records are:

1. Source documents (receipts, invoices).

2. Journals (where transactions are first entered).

3. The general ledger (a summary of all journal entries by account).

4. A trial balance (to check for errors).

5. Financial statements (like the income statement and balance sheet).

Do I need to record every single business transaction?

Yes, every transaction that has a financial impact on your business must be recorded, no matter how small. This includes every sale, purchase, payment, and receipt. Consistent recording is essential for accurate financial reporting and tax compliance.