Journal Entries

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. This lesson will cover how to create journal entries from business transactions.  Journal entries are the way we capture the activity of our business.

When a business transaction requires a journal entry, we must follow these rules:

  • The entry must have at least 2 accounts with 1 DEBIT amount and at least 1 CREDIT amount.
  • The DEBITS are listed first and then the CREDITS.
  • The DEBIT amounts will always equal the CREDIT amounts.

For another example, let’s look at the transaction analysis we did in the previous chapter for Metro Courier (click Transaction analysis):

1.  The owner invested $30,000 cash in the corporation.  We analyzed this transaction by increasing both cash (an asset) and common stock (an equity) for $30,000. We learned you increase an asset with a DEBIT and increase an equity with a CREDIT.  The journal entry would look like this:

  Debit   Credit
Cash   30,000
    Common Stock  30,000

2.  Purchased $5,500 of equipment with cash.  We analyzed this transaction as increasing the asset Equipment and decreasing the asset Cash.  To increase an asset, we debit and to decrease an asset, use credit.  This journal entry would be:

  Debit   Credit
Equipment   5,500
    Cash   5,500

3.  Purchased a new truck for $8,500 cash.   We analyzed this transaction as increasing the asset Truck and decreasing the asset Cash.  To increase an asset, we debit and to decrease an asset, use credit.  This journal entry would be:

Debit Credit
Truck 8,500
    Cash 8,500

4.  Purchased $500 in supplies on account.  We analyzed this transaction as increasing the asset Supplies and the liability Accounts Payable.  To increase an asset, we debit and to increase a liability, use credit.  This journal entry would be:

Debit Credit
Supplies 500
    Accounts Payable 500

5.  Paid $300 for supplies previously purchased.  Since we previously purchased the supplies and are not buying any new ones, we analyzed this to decrease the liability accounts payable and the asset cash.  To decrease a liability, use debit and to decrease and asset, use credit.

Debit Credit
Accounts Payable 300
    Cash 300

6.  Paid February and March Rent in advance for $1,800.  When we pay for an expense in advance, it is an asset.  We want to increase the asset Prepaid Rent and decrease Cash.  To increase an asset, we debit and to decrease an asset, use credit.

 Debit Credit
Prepaid Rent  1,800
    Cash 1,800

7.  Performed work for customers and received $50,000 cash.  We analyzed this transaction to increase the asset cash and increase the revenue Service Revenue.  To increase an asset, use debit and to increase a revenue, use credit.

Debit Credit
Cash 50,000
    Services Revenue 50,000

8.  Performed work for customers and billed them $10,000.  We analyzed this transaction to increase the asset accounts receivable (since we have not gotten paid but will receive it later) and increase revenue.  To increase an asset, use debit and to increase a revenue, use credit.

Debit Credit
Accounts Receivable 10,000
    Services Revenue 10,000

9.  Received $5,000 from customers from work previously billed.  We analyzed this transaction to increase cash since we are receiving cash and we want to decrease accounts receivable since we are receiving money from customers who we billed previously and not new work we are doing.  To increase an asset, we debit and to decrease an asset, use credit.

Debit Credit
Cash 5,000
    Accounts Receivable 5,000

10.  Paid office salaries $900.  We analyzed this transaction to increase salaries expense and decrease cash since we paid cash.  To increase an expense, we debit and to decrease an asset, use credit.

Debit Credit
Salaries Expense 900
    Cash 900

11. Paid utility bill $1,200.  We analyzed this transaction to increase utilities expense and decrease cash since we paid cash.  To increase an expense, we debit and to decrease an asset, use credit.

Debit Credit
Utilities Expense 1,200
    Cash 1,200

All the journal entries illustrated so far have involved one debit and one credit; these journal entries are called simple journal entries. Many business transactions, however, affect more than two accounts. The journal entry for these transactions involves more than one debit and/or credit. Such journal entries are called compound journal entries.

If you would like to watch another video about journal entries, click Journal Entries.

How do we prepare financial statements from these journal entries?  The journal entries just allowed us to capture the activity of the business.  In the next section we will organize the information to make it easier to prepare financial statements.