How to record accounting transactions (steps and tips)

Published Friday 13 February 2026

Table of contents

• What is recording in accounting?
• Why record-keeping matters
• Types of accounting transactions
• Recording in cash accounting vs accrual accounting
• How to record transactions in accounting
• 1. Capture transactions
• 2. Categorise your transactions
• 3. Handle depreciation and loans
• 4. Check your numbers
• 5. Create financial statements
• Common mistakes when recording transactions
• Using accountants and bookkeepers
• How Xero simplifies recording transactions
• FAQs on recording accounting transactions

Key takeaways

• Set up a dedicated business bank account and connect it to accounting software to automatically import transactions, which saves time and reduces manual data entry errors.
• Categorise every transaction into the correct account type (sales revenue, operating expenses, cost of goods sold) using a well-structured chart of accounts to track your business performance accurately.
• Capture all transactions immediately by photographing receipts with your phone and recording invoices when they're issued, not just when payment occurs if you use accrual accounting.
• Reconcile your accounting records with bank statements regularly to identify discrepancies like unrecorded bank fees or transactions from other accounts, ensuring your financial reports are accurate.

What is recording in accounting?

Recording in accounting means entering your business's financial transactions into your accounting records. This process tracks money flowing in and out of your business, including sales, expenses, loans, and investments. Accurate recording gives you a clear picture of your financial position at any time.

Why record-keeping matters

Good record-keeping helps you make informed decisions and stay compliant with tax requirements. It helps you:

• determine whether your business is profitable
• identify who owes you money and who you owe
• assess whether you can meet upcoming financial obligations
• calculate what your business is worth

Your records also form the basis of your tax returns. Inaccurate recording can lead to incorrect tax filings, which may trigger penalties or complications during an audit.

Types of accounting transactions

Every business transaction falls into one of four main categories. Understanding these helps you know what to record and when.

• Sales transactions: money received from customers for products or services
• Purchase transactions: money spent on inventory, supplies, or services for your business
• Receipt transactions: cash or payments received, including customer payments and refunds you receive
• Payment transactions: cash or payments made, including paying suppliers and expenses

Each transaction type affects your accounts differently. Sales and receipts increase your cash or accounts receivable, while purchases and payments decrease cash or increase accounts payable.

Recording in cash accounting vs accrual accounting

The timing of when you record a transaction depends on your accounting method.

Cash accounting: Record transactions when money changes hands. You enter income when you receive payment and expenses when you pay them.

Accrual accounting: Record transactions when invoices are sent or received, regardless of when payment occurs.

Most small businesses start with cash accounting because it's simpler, although some businesses must use accrual accounting for tax purposes once their average annual gross receipts exceed a certain threshold.

If you're unsure which method to use, check with your accountant or bookkeeper.

How to record transactions in accounting

Follow these five steps to record your business transactions accurately and efficiently.

1. Capture transactions
2. Categorise your transactions
3. Handle depreciation and loans
4. Check your numbers
5. Create financial statements

Each step builds on the previous one to create a complete picture of your financial activity.

1. Capture transactions

A dedicated business bank account keeps personal and business expenses separate, making transaction tracking much easier.

Your bank statement will reflect most of your business transactions, giving you a solid starting point for your records. Link your bank account to accounting software to import transactions automatically, saving time and reducing manual data entry errors.

Recording invoices and bills at time of issue

If you use accrual accounting, record purchase invoices as soon as they arrive and sales invoices as soon as you send them. These transactions won't appear in your bank account until payment occurs.

You can enter invoices manually or use accounting software for invoicing and bill processing. Software automatically records amounts, dates, taxes, and customer or vendor details at the time of issue.

Getting info from paper receipts

Cash purchases and personal card expenses are easy to forget. Photograph receipts with your phone to capture them immediately.

You can enter the details manually later or use an optical character recognition (OCR) app. OCR scans your receipt photo, extracts the transaction data, and enters it into your accounting software automatically.

Pulling records from online shops or POS systems

Point-of-sale (POS) and ecommerce systems can provide detailed sales data that improves your record accuracy. Integration with accounting software lets you:

• link transaction fees to specific sales
• connect courier costs to individual orders
• calculate true cost of sales automatically

Connect your POS or ecommerce platform to your accounting software to pull this data together in one place.

Entering expenses from other bank accounts

When employees use personal cards for business expenses, reimburse them from your business account and keep a copy of the receipt.

If expense claims are frequent in your business, use an expense app. Employees can capture receipts, submit reimbursement claims, and create accounting entries all from their phone.

2. Categorise your transactions

Categorising transactions means sorting each entry into the right account type. This helps you track income, expenses, assets, and liabilities separately.

Common categories include:

• Sales revenue: money received from customers
• Investment income: interest earned on bank accounts
• Cost of goods sold (COGS): direct costs of products you sell
• Operating expenses: utilities, advertising, consulting, and similar costs

These categories form your chart of accounts. Most accounting software includes a default chart you can use or customise.

Consider involving an accountant or bookkeeper when setting up your chart of accounts. Your category choices affect how well you can analyse income and spending later.

3. Handle depreciation and loans

Most income and expenses are straightforward to record. However, some transactions require extra attention.

Fixed assets like vehicles, equipment, and buildings need special treatment:

• Record them as assets, not expenses
• Apply annual depreciation to reflect declining value
• Follow tax rules for depreciation claims

Loan repayments must be split into two parts:

• Principal (reduces the loan balance)
• Interest (recorded as an expense)

Owner contributions and withdrawals also need proper documentation.

These areas have specific compliance requirements. If you don't have one already, find an accountant, bookkeeper, or tax professional through Xero's advisor directory.

4. Check your numbers

Bank reconciliation means comparing your accounting records to your bank statement to ensure they match. For example, some large restaurant chains use this process to compare financials from nearly 20 different entities.

Discrepancies often occur because of:

• cash transactions not yet deposited
• transactions from other accounts
• payments that haven't cleared
• bank fees you forgot to record

Accounting software simplifies reconciliation by importing bank transactions automatically. It shows matches between your bank statement and accounting entries so you can confirm everything is correct.

5. Create financial statements

Accurate transaction records let you generate reliable financial statements. These reports give you insight into your business performance.

Key financial statements include:

• Profit and loss statement: shows whether your business is making or losing money
• Balance sheet: shows your business's net worth (assets minus liabilities)
• Cash flow statement: shows how cash moved in and out of your business

Common mistakes when recording transactions

Even experienced business owners can make recording errors. Here are some common ones to watch for and how to avoid them.

• Mixing personal and business expenses: Use a dedicated business bank account and card to keep transactions separate.
• Forgetting cash transactions: Photograph receipts immediately and enter them the same day.
• Choosing the wrong categories: Review your chart of accounts regularly and ask your accountant if you're unsure.
• Losing supporting documents: Store receipts, invoices, and bank statements digitally for easy retrieval.

Accounting software helps prevent many of these errors by automating data entry and prompting you to categorise transactions correctly.

Using accountants and bookkeepers

Understanding transaction recording helps you stay on top of your finances. However, professional support adds an extra layer of accuracy and compliance.

Consider working with a bookkeeper or accountant if you:

• want someone to review your records for errors
• need help with complex transactions like depreciation or loans
• prefer to focus on running your business

Professional bookkeepers and accountants can spot and fix mistakes quickly. Find one through Xero's advisor directory.

How Xero simplifies recording transactions

Recording transactions can be quick and straightforward. Xero automates the tedious parts so you can focus on running your business.

Xero helps you:

• Import bank transactions automatically: connect your bank account and transactions flow into Xero daily
• Categorise with smart suggestions: Xero learns your patterns and suggests categories for recurring transactions
• Capture receipts on the go: snap photos of receipts with the Xero app and attach them to expenses
• Reconcile in minutes: match bank transactions to accounting entries with a few clicks

Ready to simplify your transaction recording? Get one month free and see how Xero can save you time.

FAQs on recording accounting transactions

Common questions about recording business transactions.

What are the four types of transactions in accounting?

The four main types are sales, purchases, receipts, and payments. Sales and purchases track what you sell and buy, while receipts and payments track the actual movement of money.

What are the rules for recording accounting transactions?

Record every transaction that affects your business finances. Use the correct timing based on your accounting method (cash or accrual), categorise each transaction accurately, and keep supporting documents like receipts and invoices.

What's the difference between recording and reconciling transactions?

Recording means entering transactions into your accounting system. Reconciling means comparing your records to your bank statement to confirm they match and identifying any discrepancies.

What happens if I record a transaction incorrectly?

Incorrect entries can lead to inaccurate financial reports and tax filings. Most accounting software lets you edit or delete entries to fix mistakes. For significant errors, consult your accountant to ensure your records and tax returns are corrected properly.

How long should I keep accounting records?

Keep your accounting records for three to seven years, depending on your location and tax requirements. Retain supporting documents like bank statements, receipts, and invoices in case of an audit.