Accounting transactions: How to record and manage your finances

Published Wednesday 7 January 2026

Table of contents

• What are accounting transactions?
• Types of accounting transactions
• Common accounting transaction examples
• Why record-keeping matters
• Recording in cash accounting vs accrual accounting
• How to record transactions in accounting
• How long do you keep accounting records?
• Using accountants and bookkeepers
• Simplify your transaction recording with Xero
• FAQs on accounting transactions

Key takeaways

• Establish a dedicated business bank account to automatically separate personal and business expenses, then connect it to accounting software for real-time transaction capture and reduced manual data entry.
• Categorize all transactions into specific account types (income, expenses, assets, liabilities) using a well-structured chart of accounts to ensure accurate financial reporting and business analysis.
• Reconcile your accounting records with bank statements regularly to catch discrepancies from cash transactions, timing differences, or bank fees that could affect your financial accuracy.
• Seek professional help from accountants or bookkeepers for complex transactions like depreciation, loan payments, and capital assets to ensure compliance and avoid costly mistakes.

What are accounting transactions?

An accounting transaction is any business event that has a financial impact on your business's accounts and can be measured in monetary terms. Think of it as any activity that changes your financial position, like making a sale, paying a bill, or taking out a loan. Every transaction must be recorded in your books to keep your financial records accurate and up to date.

Types of accounting transactions

Accounting transactions can be grouped in a few different ways. Understanding these types helps you categorize them correctly in your books.

The main types are based on who is involved and how cash is exchanged:

• External transactions: These happen between your business and an outside party, like a customer, supplier, or lender. Buying inventory or selling a product are common examples.
• Internal transactions: These are events that occur entirely within your business. For instance, when you use office supplies from your inventory, it's an internal transaction that moves value from one account (inventory) to another (supplies expense).
• Cash transactions: This is the simplest type, where payment is made immediately. When a customer pays you in cash or with a debit card at the time of sale, that's a cash transaction.
• Credit transactions: These involve a promise to pay later. When you send an invoice to a customer or receive a bill from a supplier, you're dealing with a credit transaction. The cash exchange happens at a later date.

Common accounting transaction examples

Seeing transactions in action makes them easier to understand. Here are some everyday examples you'll encounter as a small business owner:

• Sales revenue: A customer buys a product from your online store.
• Supplier payments: You pay a bill for raw materials you purchased last month.
• Operating expenses: You pay your monthly rent for your office space.
• Payroll: You pay your employees their weekly wages.
• Asset purchase: You buy a new computer for your business.
• Loan proceeds: You receive funds from a bank loan you secured.
• Owner's investment: You transfer personal funds into your business bank account.

Why record-keeping matters

Recording business transactions helps you understand:

• Profitability: Whether you're making money or losing it
• Cash flow: Who owes you money and who you owe
• Financial obligations: Whether you can meet upcoming payments
• Business value: What your company is worth

These records are essential for calculating your taxes accurately. Accurate transaction records help you file correct tax returns and avoid issues during audits.

Recording in cash accounting vs accrual accounting

Transaction timing depends on your accounting method. Accrual accounting records transactions when invoices are sent or received. Cash accounting records transactions only when money actually changes hands.

Learn more about the difference between cash and accrual accounting.

How to record transactions in accounting

There are five steps to recording accounting transactions:

1. Capture transactions

A dedicated business bank account separates personal and business expenses automatically. Your bank statement then reflects all business transactions. You can copy these transactions directly into your accounting records or link your bank account to accounting software for automatic data flow.

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. 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 optical character recognition (OCR) 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 employees claim expenses often in your business, an expense app on their phone can help. It can capture the receipt, send the reimbursement claim, and automate the accounting entry.

2. Categorize your transactions

When you categorize transactions, you sort your business activities into specific account types. Common categories include:

• Income: Sales revenue, investment income, service fees
• Expenses: Cost of goods sold, utilities, advertising, consulting
• Assets: Equipment, inventory, accounts receivable
• Liabilities: Loans, accounts payable, credit card debt

The categories on a chart of accounts are really important because they help classify transactions into the core Elements of Financial Statements (such as income, expenses, liabilities, and assets), which are foundational concepts for determining business value.

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.

3. Get help with things like depreciation and loans

Simple transactions like sales and basic expenses are straightforward to record. Complex transactions like capital assets, depreciation, and loan payments require specialized knowledge and careful handling.

You record assets like vehicles, equipment, and commercial buildings as fixed assets. You depreciate these assets each year to reflect that they're losing value, and you can claim the depreciation as a tax deduction. There are detailed rules for how you apply depreciation, so it is worth getting a professional to help you stay compliant.

Meanwhile you need to split loan repayments into a principal component and an interest component, and record each part 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 in the Xero advisor directory.

4. Check your numbers

Bank reconciliation ensures your accounting records match your bank statement exactly. Common reasons for discrepancies include:

• Cash transactions: Payments made with cash instead of bank transfers
• Multiple accounts: Transactions processed through different bank accounts
• Timing differences: Invoices sent but not yet paid
• Bank fees: Charges that appear on statements but not in 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

Financial statements are the primary goal of recording accounting transactions. Accurate transaction recording enables you to create:

• Income statements: Show whether your business is profitable
• Balance sheets: Display your business's net worth and financial position
• Cash flow statements: Track how cash moves in and out of your business

How long do you keep accounting records?

You must keep your records to meet tax and audit requirements. The Internal Revenue Service (IRS) provides specific guidelines on record retention; for example, you must keep records for seven years if you file a claim for a loss from a bad debt deduction.

• Digital records: Accounting software backups and transaction data
• Supporting documents: Bank statements, receipts, invoices, and contracts
• Tax filings: Completed returns and all supporting documentation

Using accountants and bookkeepers

Professional oversight ensures accuracy even when you understand transaction recording basics. Bookkeepers and accountants catch errors quickly, ensure compliance, and provide strategic financial insights that support business growth.

Professional bookkeepers and accountants do this work for a living. They'll spot and fix mistakes quickly. If you want the peace of mind of professional support, check out the Xero advisor directory.

Simplify your transaction recording with Xero

Recording every transaction accurately can feel like a full-time job, but it doesn't have to be. Xero online accounting software automates many of these steps, from capturing receipts with Hubdoc to connecting directly with your bank account for real-time updates.

By simplifying your bookkeeping, Xero gives you back time to focus on what you love: running your business, not your books. Get one month free.

FAQs on accounting transactions

Still have questions? Here are answers to some common queries about accounting transactions.

What are the 7 types of transactions in accounting?

While transactions can be categorized in many ways, they generally fall into key types like sales, purchases, receipts, payments, asset sales, liability payments, and owner's equity transactions. The most important distinction for day-to-day bookkeeping is often between cash and credit transactions.

What are the 4 types of transactions?

The four main types of financial transactions in a business are sales (earning revenue), purchases (buying goods or services), receipts (receiving cash), and payments (paying out cash). These cover the fundamental flow of money in and out of your business.

What is the difference between a transaction and an event?

In accounting, a transaction is a business event that has a measurable financial impact and is recorded in the books. Not all business events are transactions. For example, hiring a new employee is an event, but the transaction only occurs when you actually pay them their salary.

Do I need to record every single transaction?

Every transaction that affects your business's finances must be recorded. This ensures your financial statements are accurate, helps you manage cash flow, and keeps you compliant for tax purposes. Using accounting software can help automate this process so nothing gets missed.