After analyzing and preparing business documents, the transactions are then recorded in the books of the company. In double-entry accounting, transactions are recorded in the journal through journal entries.
A journal, also known as Books of Original Entry, keeps records of business transactions in a systematic order.
Transactions are recorded in the journal in chronological order, i.e. as they occur; one after the other.
A simple journal looks like this:
| Date yyyy |
Particulars | Debit | Credit | |
|---|---|---|---|---|
| mm | dd | Account debited | amount | |
| Account credited | amount | |||
| dd | Account debited | amount | ||
| Account credited | amount | |||
A column for posting reference or folio may also be included to facilitate easier tracking and cross-referencing with the ledger. Also, an explanation of the transaction may be included below the entry. The journal would then look like this:
| Date yyyy |
Particulars | PR | Debit | Credit | |
|---|---|---|---|---|---|
| mm | dd | Account debited | ref. | amount | |
| Account credited | ref. | amount | |||
| Short explanation or annotation. | |||||
Let's try to prepare the journal entry for this transaction: On June 3, 2021, our company purchased computer equipment for its main office and paid $1,200.00 in cash.
When we analyze that transaction, it would show that the accounting effects would be an increase in an asset account (Computer Equipment), and a decrease in another asset (Cash) since we paid for the equipment.
We would then increase Computer Equipment by debiting it and decrease Cash by crediting it. The journal entry would be:
| Date 2021 |
Particulars | Debit | Credit | |
|---|---|---|---|---|
| Jun | 3 | Computer Equipment | 1,200.00 | |
| Cash | 1,200.00 | |||
| To record purchase of computer. | ||||
If you are not yet familiar with the accounting elements and how each they work, see our lesson about Fundamental Accounting Concepts here.
You will have no trouble as long as you know how to use debits and credits and what accounts to record.
In the above example, computer equipment is an asset account. To increase an asset account, you debit it. Hence, we debited Computer Equipment. Cash is also an asset account. However, there is a decrease in cash because we paid for the computer equipment. And so, we credited Cash.
When there is only one account debited and one credited, it is called a simple journal entry. There are however instances when more than one account is debited or credited. They are called compound journal entries.
Let's take the previous transaction and change it up a bit. Here's the new transaction: On June 3, 2021, our company purchased computer equipment for $1,200.00. Our company paid $800.00 and the $400.00 balance will be paid after 30 days.
The journal entry would be:
| Date 2021 |
Particulars | Debit | Credit | |
|---|---|---|---|---|
| Jun | 3 | Computer Equipment | 1,200.00 | |
| Cash | 800.00 | |||
| Accounts Payable | 400.00 | |||
| To record purchase of computer. | ||||
The journal entry shows that the company received computer equipment worth $1,200. Cash is decreased by $800, the amount paid.
In addition, the company incurred in an obligation to pay $400 after 30 days. The liabilities of the company increased. When we increase liabilities, we credit it. That is why we credited Accounts Payable (a liability account) in the above entry.
Notice that the total amount debited is equal to the total amount credited.
Great! On the next page we will present more examples of recording transactions using a comprehensive illustrative case.
Journal entries are used to record business transactions and events.
Journal entries are recorded in the "journal", also known as "books of original entry". A journal entry is made up of at least one account that is debited and at least one account credited.
A simple journal entry has 1 account debited and 1 account credited. A compound journal entry contains more than 1 account on either the debit or credit side.
