What is a Journal Entry in Accounting

What is a journal entry in Accounting? Journal entry is an entry to the journal. Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. Ledger is a record that keeps accounting transactions by accounts. Account is a unit to record and summarize accounting transactions. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts. Double-Entry Recording of Accounting Transactions To record transactions, accounting system uses double-entry accounting. Double-entry implies that transactions are always recorded using two sides, debit and credit. Debit refers to the left-hand side and credit refers to the right-hand side of the journal entry or account. The sum of debit side amounts should equal to the sum of credit side amounts. A journal entry is called "balanced" when the sum of debit side amounts equals to the sum of credit side amounts. T-Account This form looks like a letter "T", so it is called a T-account. T-account is a convenient form to analyze accounts, because it shows both debit and credit sides of the account.

Account

Debit Credit

Examples of Journal Entries

Transaction 1: Company A sold its products at $120 and received the full amount in cash.

Steps Self-Questions Answers

1 What did Company A receive? Cash.

2 If Company A received cash, how would this affect the cash balance? Receiving cash increases the cash balance of the company.

3 Which side of cash account represents the increase in cash? Debit side (Left side).

4 What is the account name to record the sales of products. Sales.

5 Which side of sales account represents the increase in sales? Credit side (Right side).

6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes.$120 = $120

[Journal entry to record transaction 1]

Debit Credit

Cash 120

Sales 120

Examples of Journal Entries

Transaction 2: Company A purchased supplies and paid $50 in cash.

Steps Self-Questions Answers

1 What did Company A receive? Supplies.

2 If Company A received supplies, how would this affect the supplies balance? It increases supplies balance.

3 Which side of supplies account represents the increase in cash? Debit side (Left side).

4 What did Company A pay? Cash.

5 Which side of cash account represents the decrease in cash? Credit side (Right side).

6 Does the sum of debit side amounts equal to the sum of credit side amounts? In other words, does this journal entry balance?

Yes.$50 = $50

[Journal entry to record transaction 2]

Debit Credit

Supplies 50

Cash 50

Debits and Credits of Accounts

Debit Credit

Increase in asset accounts Decrease in asset accounts

Increase in expense accounts Decrease in expense accounts

Decrease in liability accounts Increase in liability accounts

Decrease in equity accounts Increase in equity accounts

Decrease in revenue accounts Increase in revenue accounts

Normal Balances of Accounts

Accounts have normal balances on the side where the increases in such accounts are recorded. Asset accounts have normal balances on debit side. Expense accounts have normal balances on debit side. Liability accounts have normal balances on credit side. Equity accounts have normal balances on credit side. Revenue accounts have normal balances on credit side. In the financial statements, accounts are reported on the sides where they have normal balances.

Balance Sheet

Assets Liabilities

Owners' Equity

Income Statement

Expenses Revenues

Typically, journal entries are entered in chronological order and debits are entered before credits.Longer Explanation of an Accounting JournalIn accounting, a "journal" refers to a financial record kept in the form of a book, spreadsheet, or accounting software that contains all the recorded financial transaction information about a business.An accounting journal is created by entering information from receipts, sales tickets, cash register tapes, invoices, and other data sources that show financial transactions. Business transactions should be recorded so that they can be presented in the journal in chronological order.Before computers, an accounting journal was a physical log book with multiple columns to record financial transactions for a company. Today, most businesses use soft type of financial accounting software to record and manage their business transactions. These transactions are then assigned to a specific ledger class using a Chart of Accounts number to prepare profit and loss statements, financial statements, and other important financial reports.Each listed transaction is referred to as a journal entry.Information from the journal is then recorded in ledgers.A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced". Journal entries can record unique items or recurring items such as depreciation or bond amortization. In accounting software, journal entries are usually entered using a separate module from accounts payable, which typically has its own subledger that indirectly affects the general ledger; journal entries directly change the account balances on the general ledger.Some data commonly included in journal entries are: Journal entry number; batch number; type (recurring vs. nonrecurring); auto-reversing; date; accounting period; and description. Typically, accounting software imposes strict limits on the number of characters in the description; a limit of about 30 characters is not uncommon. This allows all the data for a particular transaction in a journal entry to be displayed on one row.The balance sheet is a statement showing net worth on a particular date. Journal entries are used to record injections and ejections to such net worth. After recording the transactions through journal entries the revised balance sheet can be prepared.Suppose the financial position of a company is as follows:

Balance Sheet As on 19 July 2009 Liabilities Amount Assets Amount Capital 50000 Machinery 30000 Bank Loan 20000 Building 25000 stock 10000 cash 5000 ---- ---- 70000 70000 ---- ----

Some furniture is purchased for $ 2000 in cash so a journal entry is created:

Furniture A/c debit 2000 Cash A/c credit 2000

After the above transaction the updated balance sheet would be:

Balance Sheet As on 19 July 2009 Liabilities Amount Assets Amount Capital 50000 Machinery 30000 Bank Loan 20000 Building 25000 furniture 2000 stock 10000 cash 3000 ---- ---- 70000 70000 ---- ----

Journal entries are an easier means for perpetrating financial statement fraud than adjusting the subledgers. The former requires only a management override, while the latter requires collusion with other departments[1]. False journal entries figured prominently in the frauds at WorldCom, Cendant, and Xerox.

Chapter 3 Capturing Economic Events

General Ledger Debits and Credits Normal Account Balances Journal Entries The Income Statement

Chapter 3 introduces the concepts of debit and credit, and demonstrates bookkeeping activities. After studying Chapter 3 you should be able to:

Prepare common journal entries Post to the Ledger accounts Prepare a basic Income Statement

Accounting Cycle - sequence of procedures used to record, classify and summarize accounting information in financial reports, on a regular basis.Steps in the Accounting Cycle 1) Record (journalize) transactions. 2) Post journal entries to Ledger accounts.

3) Prepare a Trial Balance. 4) Make adjusting entries. 5) Prepare an Adjusted Trial Balance. 6) Prepare financial statements. 7) Journalize and post closing entries. 8) Prepare After-Closing Trial Balance.General Journal and Journal Entries Every business transaction is recorded in the General Journal. The General Journal is called the book of original entry. A journal is a chronological record of transactions - they are in date order. Each entry is called a journal entry, and represents a different business transaction. Each transaction is recorded once, and only once. All journal entries follow the rules of debit and credit.Journal entries should be made contemporaneously with the event they are recording, or reasonably soon after the event. Keep in mind that a journal is a chronological record of events. A contemporaneous writing is one that takes place at the same time as the event. This is the best time to record an event, because the facts and details are still fresh in our minds. Necessary documents, conversations, calculations, etc., are readily available to create a correct record of the event. If we wait too long, the event will be much more difficult to reconstruct. In a legal sense, a contemporaneous writing carries much more weight than a writing made at a later date. And a writing carries much more weight than a mere recollection of events, months or years after the event has taken place. The courts recognize that people's memories about events are much clearer right after the event has taken place. As to the sale of real estate, state laws require a contemporaneous writing, to establish the exact terms and conditions of the sale. In contract law, this is called a “meeting of the minds,” and must be present for a valid contract to exist. We will use verifiable, tangible evidence whenever it exists. Tangible evidence has physical existence – we can touch it, fold, staple, copy and file the document. We will look for a check, invoice, purchase order, contract or other business document that is a record of the event, a confirmation of payment received and goods delivered, etc. These documents become the back-up documentation for our journal entry. General Ledger Transactions are classified into accounts appropriate to the business. Accounts represent major classifications, or categories, organized according to the 5 account types covered in Chapter 2. The accounts are listed in a Chart of Accounts.Posting - journal entries are copied to the accounts in the Ledger. After posting, the balance in each account is updated. Accounts always carry the most current balance.Balances in Ledger accounts ==become==> Financial StatementsBooks & Bookkeeping Journals and Ledgers were historically written in by hand. They were actual books, which is where many of the terms we use come from. Terms like bookkeeping, journal, balanced books, etc. all came from the days of manually recording entries in books.Today we use computers to do the same job, but the terminology is usually the same. The concepts we follow are identical whether we use a manual or computer based accounting system. We will use the rules of debit and credit, enter transactions into the Journal, and post to the Ledger.

Debits and Credits Journals and Ledgers can be viewed as pages of a book. Each page has lines and columns. A journal page has columns for the date, account name, and two columns for dollar amounts, referred to as the Debit and Credit columns.

Sample General Journal pageDate Account Debit Credit

Debit = Left column Credit = Right column

We enter dollar amounts in the Debit and Credit columns.The totals in the Debit and Credit columns must be equal.

Caution!! Do not confuse the concepts of debit and credit we use here, with what you read in your bank statement. Banks copy their records, and send them to you. It reflects your bank account, from the bank's perspective - which is opposite of your perspective, in an accounting sense.

Sample Ledger page Account Title

Date Description Debit Credit Balance

The Ledger page has an additional column to calculate the balance in the account. The balance is updated after each entry. A Credit balance is usually indicated by enclosing the number in parentheses: $ (500) would indicate a $500 Credit balance.

Accounts Payable Date Description Debit Credit Balance

Jan-1 Balance forward from Dec-31 (500)

The Dollar Sign $ is usually omitted in actual practice. We will always assume that we are using the US Dollar in all transactions, journals, ledgers and financial statements.Entries are transferred (Posted) from the journal to the ledger pages on a regular basis. When do we use Debit or Credit? When to use a debit or credit to record a journal entry is one of the biggest problems for beginning accounting students. It doesn't have to be difficult, if you remember a few simple rules.First, you will always use both a debit and credit. That's the idea of the double-entry system. You have two columns, so every journal entry will have an equal dollar amount in each column. Remember the Accounting Equation?

Assets = Liabilities+Owners' Equity

Left side Right Side

Debit side Credit Side

Debit = Increase Credit = Decrease

Credit = Increase Debit = Decrease

Accounts on the Left side will INCREASE with a Debit (Left column) entry. Accounts on the Right side will INCREASE with a Credit (Right column) entry. They will each DECREASE with the OPPOSITE entry.Refer to the Chart of Accounts to determine whether an account falls on the Left or Right side of the Accounting Equation. You will learn more about how this works as the course progresses. The textbook has many good examples.Normal Account Balances Accounts have a normal balance - the balance they would have if increases to the account are more than decreases to the account. If the account has a balance opposite its normal balance, we say the balance is negative, in relation to what it should be. Negative in this sense does not refer to debits or credits, but to a normal

or negative balance, regardless of whether that is a debit or credit balance.You will save a lot of time making journal entries if you remember the normal balance for the accounts.

account type normal balance example

Revenue accounts credit sales revenue

Expense accounts debit rent expense

Asset accounts debit cash, accounts receivable

Liability accounts credit accounts payable

Owners' equity accounts credit capital stock

If you are recording a sale, or other income transaction, you would credit the revenue account, and debit some other account (cash or accounts receivable). If you are recording an expense, you would debit the expense account, and credit some other account.Many transactions are so common it's easier to remember them, rather than try and think them through each time you have to record them. If you remember how to record one side of the journal entry it is fairly easy to figure out the other side from the information given, e.g.. cash sale v. credit sale.

Type of entry Do this

Record a sale credit a revenue account

Record an expense debit an expense account

Record a credit sale debit Accounts Receivable

Record a cash sale debit Cash

Buy supplies on credit credit Accounts Payable

If you refer to these charts in the beginning it will writing journal entries much easier. Soon you won't have to refer to your charts any more. A funny accounting story (yes, there are accountant jokes) A young accountant often asked his boss for advice in writing journal entries. The boss would always open his desk drawer, look at something for a moment and then tell the young accountant how the make the correct journal entry. This went on for many years.Finally the old accountant was ready to retire. The younger accountant asked the old man, "I don't know what I'm going to do without you. Whenever I've had a question you always knew the answer. What will I do when you're gone? And what's in your desk drawer? Every time I ask for advice you look in there?"The old accountant took the younger one into his office and opened his desk drawer. There was a 3" x 5" index card. It said: "Debits on the Left, Credits on the Right" -----------When you are just learning how to make journal entries, a little reminder or hint can make the task much easier. Don't try and reason out every journal entry. If you are going to replace the oil in your car, you don't have to know everything about how the engine works. You only have to find the one bolt to turn to let the oil out. Don't make the job any more difficult than it is. As an accounting student I kept these little reminders around all the time. As a professional I've done the same thing, except with more complex issues. This is just good practice. Many of the tasks we do are very mechanical in nature. Follow a few simple rules, refer to the hints and tips. About my student, Al (a true story) I taught at the Columbia College Jefferson City, MO Campus for several years. We had an administrative assistant there who enrolled in my accounting course. His name was Al (I didn't change the name, you know who you are ;-)Al struggled for 7 weeks trying to understand debits & credits, and how it all fit

together. Along about week 8 he was sweating bullets, and not at all comfortable about taking the comprehensive final. All sat in the front row. About the middle of the next to last class he sat up and loudly proclaimed, "I get it! I get it! I understand how it all works." He aced the final, and the course.And then there was Mary (another true story) Mary was another student (I did change her name). She was a last semester senior, and needed accounting for her business major. This was her third attempt, and we were all hoping 3 would be a charm. At the end of the first week she told me her story, and said she had trouble with the terminology. Mary worked in the real estate field, and had associated the term "equity" with "real property." In her mind, this was a correct association, and perhaps common slang in her office. If you look up the word equity in the dictionary, there is no association with real property. Mary was working under an incorrect definition.In accounting real property falls under the Asset category, and equity specifically refers to Owners' Equity - the owners' claim to the business assets. This is also a dictionary definition. But Mary never could get past her own personal (incorrect) definition of equity. She dropped the course, and changed her major. She was looking at a minimum of 2 more years in school, because she got hung up on one definition.I'm telling these stories for two reasons. First you might be another Al. The concepts we use may seem a little strange at first. But most students catch on, and usually long before the 8th week. And second, to make you aware that each discipline you study in college has its own vocabulary, terms and concepts. Some of them may be very unique to that particular field of study, and the terms may not apply anywhere else. In the field of accounting, our terminology IS widely used. Millions of people use the same terms and concepts daily to mean the same thing. This is part of the concept of "generally accepted" - the part of GAAP that refers to common practices. Take a little time to understand the terminology you learn in this course, and it will help you for many years to come. Accounting is nothing more than a way to organize information, so it is useful to people who have to make financial and business decisions. A large number of people use the same concepts, methods, etc. on a daily basis. You can too. Easy Method to journal entries. Follow these simple steps. Ask yourself these questions:1) Is Cash used in this transaction? Cash is your first Asset account, it falls on the Left side of the equation, and will be used very often. It is easy to remember the rules for the Cash account: Debit = Increase; Credit = Decrease.2) Was Cash received or paid?Cash Received = Increase = Debit Column = Left ColumnCash Paid = Decrease = Credit Column = Right ColumnDecide whether Cash belongs in the Debit or Credit column, write the word "Cash" in the Account column, and the dollar amount in the Debit or Credit column. You are now half way done with the journal entry.3) Enter the balancing dollar amount in the opposite column as Cash. You don't need to worry about the other account title yet. Remember that a double-entry journal entry needs equal dollar amounts in the Debit and Credit column for each journal entry. Make that dollar entry now, and you're 75% done.4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part of the journal entry. Use account titles exactly as they appear in the Chart of Accounts. Don't get creative and make up account titles. If you want to be creative take an art class. (hee, hee... just kidding ;-) 5) If Cash was not used you can substitute "Cash" temporarily where it would go IF it had been used in the transaction. For instance, suppose you are at a restaurant. You could pay in cash, or charge the meal on a credit card. Either way you have paid for a meal, and the journal entry will be very similar. So you can pencil in the word "cash" lightly where it would go. After you finish the journal entry, refer to the Chart of Accounts and replace "cash" with the appropriate account, which will usually end with "Payable" or "Receivable" such as Accounts Payable, Interest Receivable, etc.

.............. The Cash account is equivalent to the company's checking account. The balance goes up when money is deposited in the account, and the balance goes down when checks are written. It works just like your checking account!So now you know that Cash is an Asset account, is on the Left side of the accounting equation, and the balance can go up or down. The rules you use for the Cash account will be the same for all asset accounts. Now you know how to make journal entries for all asset accounts. Wasn't that easy?Liability and Owners' Equity accounts are on the Right side of the Accounting Equation, and they follow the OPPOSITE rules as the Cash account. Now you know how to make journal entries for all those accounts! Wasn't that easy, too?So if you can remember one thing, how the Cash account works, you can easily figure out each and every other account. Since there are only 2 sides to the Accounting Equation, there are only 2 possibilities. Pretty simple............... Let's try an easy example using my simple system. Some transactions are routine and happen very frequently. It helps to know these, because they represent 99% of the total journal entries a company will make. All companies earn some sort of revenue, so let's look at a sale transaction: March 20, the company made a cash sale for $100. 1) Is Cash used in this transaction? Yes. 2) Was Cash received or paid? Received. [Increase = Debit Column] --- enter the Cash portion of the journal entry

Date Account Debit Credit

Mar-20 Cash $100

The date always starts a journal entry. Enter the month once on a page, and put the day in front of each journal entry on the page, even if they are all on the same date. The day indicates the beginning of a new journal entry. You should also leave one or two blank lines between journal entries on a page.3) Enter the balancing dollar amount in the opposite column from Cash.


Mar-20 Cash $100

$100

Almost done.......4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is a sale, so we will use Sales Revenue for the Credit side of the journal entry.


Mar-20 Cash $100

Sales Revenue $100

The journal entry is in balance, and is complete. The textbook will show that a memorandum can be entered on the line below the journal entry. This should be additional information that is not contained in the journal entry itself; information that will be useful when trying to reconstruct events at a later date............... Another example. April 1, the company paid rent $500. 1) Is Cash used in this transaction? Yes. 2) Was Cash received or paid? Paid. [Decrease = Credit Column] --- enter the Cash portion of the journal entry 3) Enter the balancing dollar amount in the opposite column as Cash.


Apr-1 $500

Cash $500

Note that it is customary to enter the debit part first, and the credit entry second. The credit entry account title is indented, to help set it off from the debit account titles. These practices are used to make the journal entry easier to read, and reduce errors in posting.4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of paying an expense, in this case Rent Expense.


Apr-1 Rent Expense $500

Cash $500

An important tool for accountants...

Take care of your eraser and keep it close at all times

.............. Another example .... without cash. April 20, the company opens a charge account at Office Emporium. They buy a $1000 computer, and say "charge it!"1) Is Cash used in this transaction? No. [We will use the substitution method] 2) If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]--- enter the "cash" portion of the journal entry. Pencil "cash" in lightly, you will replace it later with the correct account title. 3) Enter the balancing dollar amount in the opposite column.


Apr-20 $1000

cash $1000

Notice that I have roughed in the structure of the journal entry, but the actual accounts have not been entered yet.4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of buying equipment, in this case we will use the account Office Equipment. 5) Refer to the Chart of Accounts and replace "cash" with the appropriate account, which will usually end with "Payable" or "Receivable" such as Accounts Payable, Interest Receivable, etc. In this case we will use Accounts Payable, one of the most frequently used accounts. Accounts Payable is used to refer to most of the common, day-to-day debts and current liabilities that a company incurs. It is short-term debt, meant to be paid soon, like the phone bill, utility bill, etc.


Apr-20 Office Equipment $1000

Accounts Payable $1000

These are all examples of simple journal entries. There is one debit and one credit. Some transactions might involve more then two accounts, and we would use three or more lines to write those entries. These are called compound journal entries (or complex journal entries). There is no limit to the number of debit or credit accounts that can be included in a journal entry. All necessary accounts will be used. The journal entry will balance, regardless of the number

of accounts used. Let's try an example of a compound journal entry. June 5, the company buys building and land for $100,000. They make a down payment of $20,000 and sign a mortgage note with their bank for the balance. An appraisal shows the land alone has a value of $10,000.1) Is Cash used in this transaction? Yes & No. [We will use the substitution method along with Cash] 2) If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]--- enter the Cash portion of the journal entry. We will use Notes Payable to enter the $80,000 we borrowed from the bank, on its own line, but on the same side as Cash - the Credit side in this case.


June-5

Notes Payable $80,000

Cash $20,0003) Enter the balancing dollar amount in the opposite column. 4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. I left 2 blank lines above, because I knew we had both land and a building, which must be entered separately.


June-5 Land $10,000

Building $90,000

Notes Payable $80,000

Cash $20,000

-------- --------

Total $100,000 $100,000In this example I have totaled the columns to show that the journal entry is in balance. In real accounting systems a total is only drawn at the bottom of the page, not after each journal entry.Here's another example of a compound journal entry. This one also shows how to record the issue of common stock, a very important journal entry to know. On May 1, Bill, Bob and Quinn create a new corporation, BBQ, Inc. They raise capital in the company by selling 10,000 shares of Common Stock for $5 per share. The common stock has a Par value of $1 per share.1) Is Cash used in this transaction? Yes. The organizers are raising initial capital to start a new company. If the stock were sold on a stock exchange this would be referred to as an IPO (Initial Public Offering). 2) If Cash were used...Would it be received or paid? Received. [Increase = Debit Column] --- enter the Cash portion of the journal entry. They sold 10,000 shares of stock at $5 per share, so they have raised 10,000 x $5 = $50,000.


May-1 Cash $50,000

3) Enter the balancing dollar amount in the opposite column. 4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. Common stock is recorded as a credit to the Common Stock account. It is recorded at Par value, in this case $1 per share. So 10,000 x $1 = $10,000.


May-1 Cash $50,000

Common Stock $10,000

The journal entry is out of balance and we need to finish it up. Any excess raised by the sale of stock is credited to the Additional Paid-In Capital account.


May-1 Cash $50,000

Common Stock $10,000

Additional Paid-In Capital $40,000 This is a good example of an important journal entry every accountant and bookkeeper should know. We don't use it very often, but it's important to know how to make this type of journal entry. A word about issuing stock. Each state has slightly different laws regarding corporations. Most states permit Par value stock, and some have a Legal Capital rule, forcing corporations to maintain tangible capital equal to the Legal Capital. This is in place to protect stockholders. Some states permit No-Par stock. States also allow Preferred stock, which pays a fixed dividend, similar to an interest-bearing investment. Preferred stock usually has a Par value, and is recorded as in the example above, except the Preferred Stock account is used. Some company's maintain a separate account Additional Paid-In Capital on Preferred Stock, but Additional Paid-In Capital usually reverts to the Common stockholders, regardless of it's source.Posting to the Ledger Journal entries must be posted to the Ledger accounts on a regular basis. In many computer based systems this is done automatically, when journal entries are made. In a manual system, and some computer systems, the journal entries are posted on a daily, weekly or monthly basis, called "batch posting." When you Post, you simply take each line from the journal entries, and transfer the amounts to the corresponding Ledger accounts. You have to be very careful to post all journal entries, get the dollar amounts right, and enter them in the correct column of the correct account. Needless to say, in a manual system errors do get made. Posting is actually a routine and mechanical procedure. Using T-Accounts You will see many examples of T-Accounts in your textbook. A T-Account is just a simple way to represent a Ledger account. It's handy for accounting students, because you can make quite a few T-Accounts on one page, and post journal entries quickly. This makes it easier to do homework assignments or analyze transactions.Most of your homework assignments will only use a few accounts, and there will only be one or two entries to each account. You can make 3 T-Accounts across a page, and several rows down the page. The Cash account should be larger than the rest, since it will have quite a few entries in most assignments.When you post to T-Accounts, make a large T and write the name of the account above it. Write the Debit entries on the left half of the T, and Credit entries on the right side of the T. I usually draw a line underneath the entries, net all the entries together, and put the balance on the correct side of the T below the line.

The Income Statement Relates to a period of time. Revenue - the price of your goods and services Expenses - costs incurred in earning revenueNet Income - the excess of Revenue over Expenses, on the Income Statement

Net Loss - the excess of Expenses over Revenue, on the Income StatementNet Income is synonymous with Net Profit. Debit and Credit Rules Revenues = Credit Entry Expenses = Debit EntryAll revenue and expense entries follow these simple rules. The opposite side entry is usually made only to correct an error in an earlier journal entry. This is true of all income statement accounts. Many balance sheet accounts tend to increase and decrease on a regular basis. Cash, Inventory, Accounts Receivable, Supplies, Accounts Payable all change on a frequent basis. Income statement accounts only increase, and do so according the the rules above. It is really easy to remember this simple rule. ..... Revenue ..... Example February 3, the company makes a credit sale of $250.


Feb-3 Accounts Receivable $250

Sales Revenue $250

Example February 5, the company makes a cash sale of $250.


Feb-5 Cash $250

Sales Revenue $250

These two entries are almost identical. Notice that Sales Revenue is on the Credit side in both entries. Remember this and it will make all your journal entries easier. When you record a revenue you will put it on the Credit side...... Expenses ..... Example February 1, the company pays rent, $500.


Feb-1 Rent Expense $500

Cash $500

Example February 5, the company has an service company clean their office every week. The fee is $100 each week, and the bill is paid at the end of the month. This is the first time the office has been cleaned this month.


Feb-5 Office Expense $100

Accounts Payable $100

These are both examples of an Expense entry. The expense part is always in the Debit column. You will list it first, and then either Cash or Accounts Payable. An entry to record Payroll Expense would credit Wages Payable. An entry to record Interest Expense would credit Interest Payable. These are special payable accounts. Most common business expenses will credit Accounts Payable or occasionally Cash.When to record Revenue Realization Principle - at the time goods are sold or services are rendered.When to record Expenses Matching Principle - offsetting expenses against revenues in the appropriate time period. For instance, the bill for June's long distance phone calls is paid in July. The long distance expense should show up on the June income statement.

Jane opens a jewelry repair store. She invests $25,000 into her new business. She also leases store space, purchases an initial inventory of jewelry and watch parts, and begins operations.Here are some examples of her journal entries for the first month:

Date Account Names & Explanation Debit Credit

3/1 Cash 25000 Capital 25000 Owner contributes $25000 in cash to capitalize the business. 3/5 Lease Expense 1700 Cash 1700 Paid first month's store lease of $1700. 3/10 Jewerly Parts 3800 Accounts Payable 3800 Purchased $3800 in jewelry repair parts on account, payable in 30 days. 3/15 Cash 1250 Revenue 1250 Sales of $1250 3/15 Expenses 350 Jewelry Parts 350 $250 in jewelry repair parts were used. 3/28 Accounts Payable 3800 Cash 3800 Paid $3800 to suppliers for parts purchased earlier in the month. 3/30 Office Supplies 125 Office Furniture 225 Cash 350

Purchased office supplies and filing cabinet from Oliver’s Office Supplies.

Notice how each transaction is balanced. Everything entered on the left hand (debit) side equals the (credit side) right hand side. That’s what double entry bookkeeping is all about—transactions must balance. It’s kind of like what you learned in basic algebra classes–if you can remember back that far – what you did to one side of the equation you had to do to the other side.Most of the above transactions were entered as simple accounting journal entries with each one debiting one account and crediting another.The entry for 3/30 is a compound accounting journal entry. It debited two separate accounts (office supplies and office furniture and credited one account (cash). It could have been entered as two simple journal entries; however, the compound form is more efficient.No account numbers were used in the above examples. In real life, account numbers and codes are often utilized for references and are found in your chart of accounts.

Sample General Ledger Journal EntryFor the purpose to analyze sample general ledger journal entry first let us distinguish two steps of this concept, i.e.:

business transactions having an impact on the financial position of the business are first recorded in the general journal, which is one of the accounting prime entry books, then

entries from general journal are posted to the general ledger, i.e. to the corresponding account, the universe of which composes general ledger.This process is divided into 2 steps, since recording of business transactions directly to the general ledger accounts due to significant volume of transactions causes huge amount of mistakes and lost track of their corrections.General JournalGeneral journal includes all the business transactions which are recorded in the chronological manner, i.e. day by day. Structure and form of general journal differs depending on the business needs, however there is a mandatory data to be present in any journal. This data is:

date of transaction; names of accounts which are debited and credited description of the transactions columns for debit and credit where exact figures of business transaction are recorded.

In the picture below you can see how the general journal looks like and what information is included there. Considering sample general ledger journal entry below each transaction will be first recorded into the general journal in the way as it is presented in the picture.

General LedgerNext step to record any sample general ledger journal entry is to post transactions recorded in the general journal to the general ledger accounts. The accounts classify accounting data into certain categories, the main of which are:

Assets Liabilities Equity Revenue Expenses

We can use either T accounts, which have T form, with one side for Debit and one side for Credit. In practice of course there are no T accounts and several column general ledger format is used. In the picture below you can see how this forma looks like. The first column includes date, second column - description of transaction, third and fourth - debit and credit columns, and the last one - balance of the account after the transaction has been posted. Positive balance means debit, negative balance -means credit.

Sample General Ledger Journal Entry will be presented by analyzing several transactions performed by XYZ company.We will be analyzing the following transactions of XYZ company in December of the year 2008:

o 1. December 15 - shareholders established XYZ company and invested cash of $12000. This is a trading company reselling furniture and also providing furniture maintenance services;

o 2. December 17 - Acquired on account land costing $15000 and building for cash $10000;o 3. December 19 - acquired on account supplies costing $1200 and goods (furniture) for resale for $6000;o 4. December 20 - Provided services to customers for cash, i.e. for $570

Sample General Ledger Journal Entry ProcessJournalizing and posting 1st transaction:On December 15 shareholders established company XYZ by investing cash. First step is to journalize the transaction, i.e. record it in the general journal. The following entry is being done:D Cash $12000C Share Capital $12000In the picture below you can see how general journal entries look like. The next step of this sample general ledger journal entry is to post these entries to the according general ledger accounts, i.e. Cash and Share Capital.Here we are using multi-column general ledger format (not T accounts).

$12000 is debited to the Cash account of the general ledger and afterwards balance in the Cash account is calculated, which is $12000 on the debit side. Since Cash account belongs to the assets category, its balance after the posting will be always on the debit side.

The same amount of $12000 is credited to the Share Capital account and afterwards balance in this account is calculated. The balance is $12000 with a minus sign (we show it in the brackets), since it is credit balance. Share Capital account belong to the equity category and after the posting the balance of this account is always on the credit side.

Illustration of Journalizing and Posting - Transaction No. 1

Journalizing and posting 2nd transaction:On December 17 the company XYZ acquired on account (i.e. cash for the acquisition will be paid on the later agreed date after the purchase) land cost of which is $15000 and for cash building cost of which is $10000. The following entry is being done:D Land $15000D Building $10000

C Accounts Payable $15000C Cash $10000In the picture below you can see how general journal entries look like. Please note that the entries for this transaction go below the journal entries of the previous transaction. The next step of this sample general ledger journal entry is to post these entries to the according general ledger accounts, i.e. Land, Building, Accounts Payable, Cash.Here we are using multi-column general ledger format (not T accounts).

$15000 and $10000 are debited to the Land and Building accounts of the general ledger and afterwards balances in the Land and Building accounts are calculated, which are accordingly $15000 and $10000 on the debit side. Since Land and Building accounts belong to the assets category, their balances after the posting will be always on the debit side.

$15000 is credited to the Accounts Payable account and afterwards balance in this account is calculated. The balance is $15000 with a minus sign (we show it in the brackets), since it is credit balance. Accounts Payable account belong to the liabilities category and after the posting the balance of this account is always on the credit side.

$10000 is credited to the Cash account. Note that Cash account already contains data related to the previous transactions and has a balance of $12000. Afterwards balance in this account is calculated. The balance is $2000, which is the balance before posting this transaction decreased by credited amount of $10000.


Journalizing and posting 3rd transaction:On December 19 the company XYZ acquired on account supplies cost of which is $1200 and inventory for resale cost of which is $6000. The following entry is being done:D Supplies $1200D Inventory $6000C Accounts Payable $7200In the picture below you can see how general journal entries look like. The next step of this sample general ledger journal entry is to post the's entries to the according general ledger accounts, i.e. Supplies, Inventory and Accounts Payable.Here we are using multi-column general ledger format (not T accounts).

$1200 and $6000 are debited to the Supplies and Inventory accounts of the general ledger and afterwards balances in the Supplies and Inventory accounts are calculated, which are accordingly $1200 and $6000 on the debit side. Since Supplies and Inventory accounts belong to the assets category, their balances after the posting will be always on the debit side.

$7200 is credited to the Accounts Payable account. Note that Accounts Payable account already contains data related to the previous transactions and has a credit balance of $15000. Afterwards balance in this account is calculated. The balance is $22200, which is the balance before posting this transaction increased by credited amount of $7200.


Journalizing and posting 4th transaction:On December 20 the como any XYZ provided services to the customers for $570 and the customers paid by cash. The following entry is being done:D Cash $570C Revenue $570In the picture below you can see how general journal entries look like. The next step of this sample general ledger journal entry is to post these entries to the according general ledger accounts, i.e. Cash and Revenue.Here we are using multi-column general ledger format (not T accounts).

$570 is debited to the Cash account as an increase in Cash. Note that Cash account already contains data related to the previous transactions and has a balance of $2000. Afterwards balance in this account is calculated. The balance is $2570, which is the balance before posting this transaction increased by debited amount of $570.

The same amount of $570 is credited to the Revenue account and afterwards balance in this account is calculated. The balance is $570 with a minus sign (we show it in the brackets), since it is credit balance. Revenue account after the posting will always be on the credit side.


So this was a comprehensive sample general ledger journal entry explaining how business transactions are recorded and classified in the accounting books.

Documents

What is a Journal Entry in Accounting