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Journal Entries: Recording Business Transactions

Introduction

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.

In a Nutshell

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. You will learn how to prepare them in this lesson.

Accounting Journal

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.      

Illustration

Let's try to prepare the journal entry for this transaction: On June 3, 2020, 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
2020
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 is affected, 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.

Compound Journal Entries

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, 2020, 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
2020
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.

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