Journal Entries

Key Things To Know

Key Things To Know

Journal Entry:

Format used to record and summarize transactions of the company

Debits are written on top
Credits are written on bottom, slightly to the right
Total debits must equal total credits  (top must equal bottom)
Each journal entry has at least one debit and at least one credit

Examples of journal entries:

Cash                                        $100,000
          Common Stock                       $100,000

Furniture                               $10,000
          Cash                                          $10,000

Equipment                            $30,000
          Cash                                          $18,000
          Notes Payable                         $12,000

Debit has no meaning except that it goes on top in a journal entry and on the left in a T account.
Credit has no meaning except that it goes on the bottom in a journal entry and on the right in a T account

Transaction Refresher:

(see the two sections on recording on a spreadsheet if you need more help with this)

All company transactions fall into one of the following categories:

Related to the balance sheet only – assets, liabilities, and owner’s equity

1)  Receive cash from investors or pay dividends to investors
2)  Trade an asset for another asset (or buy an asset and pay cash)
3)  Buy an asset and incur a liability – you will pay later
4)  Pay cash to reduce what is owed – reduce a liability

Related to the income statement – revenues and expenses

When you record a revenue you also must record an increase to asset
When you record an expense you also must record an increase to a liability or a decrease to an asset.

1)  Provide goods or services (revenue +) and receive cash now (cash +)
2)  Provide goods or services (revenue +) and get paid later (receivable +)
3)  Receive a service (expense -) and pay cash now (cash -)
4)  Receive a service (expense -) and pay cash later (payable +)
5)  Use an asset (expense -) and decrease an asset or increase accumulated depreciation

Transactions can be summarized this way:

1) You get something (asset) and you give up something to get it (an asset or a liability)
2)  You provide goods or services in exchange for an asset
3)  You are provided services (expense) that you pay for now or will pay for later
4)  You use an asset in your day to day business to get revenues (expense)

There are always at least two things changing for each transaction

Each asset, liability, owner’s equity, revenue and expense account gets a “T” account.
It is called a “T” account because you draw a T first.

Debit is always on the left
Credit is always on the right

For each type of account, whether it is a debit or a credit depends on if it is increasing or decreasing.  Follow the chart below.


Assets & Expenses    —  

Increases are debits
Decreased are credits

Liabilities, Owner’s Equity, Revenues — 

Increases are credits
Decreases are debits

First — decide what account is being affected and what type of account it is
Second — decide if that account is increasing or decreasing
Third – use the previous guidelines to determine if the change is a debit or a credit

Write the journal entry to show the accounts that are changing:
 
Debit account name                      $XXX
         Credit account name                    $XXX

Balancing “T” accounts:

Make a “T” account for each account name used – one “T” account for each account

The “T” account is used to summarize the account and determine the balance

Take the amounts in the journal entries and put them in the “T” accounts

1)  Put the debits on the left 
2)  Put the credits on the right 

3)  Add up all the debits, the left side
4)  Add up all the credits, the right side 

5)  Take the largest number less the smallest number and put the difference 
on the largest side

Assets and Expenses –  will always have a debit balance

Liabilities/Owner’s Equity/Revenues – will always have a credit balance