Why Is Analyzing Transactions in Accounting Important?

Transaction analysis is a common activity for accountants. The process often involves looking at the documents that support a business activity. Accountants must make various judgments based on the information contained in these documents. This analysis is necessary for all transactions to meet specific purposes in traditional accounting activities.

The accounting cycle defines when an accountant should review transactions. It's important that accountants follow the accounting cycle to properly account for all business activity. The first stage of the accounting cycle is record transaction. This stage also allows for transaction analysis by accountants. Each transaction must have the proper documentation and meet the company’s guidelines prior to inclusion in the general ledger.

Primary purposes of transaction analysis are to gauge the relevance and reliability of a transaction. Relevance indicates a transaction has predictive value. In short, the transaction should add value to the business and allow for predicting future earnings. Timeliness is also an issue here: Accountants must record transactions in the proper period to meet relevance requirements. Reliable information means a transaction is verifiable and a faithful representation of the transaction.

Transaction analysis also reviews the comparability and consistency of the individual item. Comparability means that the aggregate total of all transactions allows stakeholders to compare one company’s information to another. In accounting, accountants should be able to compare one individual transaction to another. Consistency means the company has policies in place that ensure all transactions go through the same process. This ensures no differences exist and that the general ledger contains indifferent information or reports.

It's often impossible to thoroughly review each transaction every time one comes through the company’s accounting system. A company usually creates specific policies in the accounting department for specific types of transactions. This ensures that all transactions in a specific department — such as accounts receivable — go through the same process. For example, conducting math checks on computed numbers is a common transaction analysis technique.