When a small business makes a financial transaction, they make a journal entry in their accounting journal in order to record that transaction. The transaction is recorded in the general journal or one of the special journals for the most active accounts. The most common special journals are the Sales Journal, the Purchases Journal, the Cash Receipts Journal, and the Cash Disbursements Journal.
An accounting journal is a detailed record of the financial transactions of the business. The transactions are listed in chronological order, by amount, by accounts that are affected, and in what direction those accounts are affected. Depending on the size and complexity of the business, a reference number can be assigned to each transaction and a note may be attached explaining the transaction.
The accounting journal is the place where the details lie. The general ledger is where you look for the big picture. A sample accounting journal page has columns for the date, the account, the amount of the debit, and the amount of the credit.
When to use a Debit or Credit in a Journal Entry
One of the most difficult things to get a handle on when setting up your books is when to use a debit and when to use a credit. Here are some simple rules. If you will follow these rules, it will make your accounting life a lot easier.
- You will always use both a debit and a credit for every journal entry. That is what the system of double-entry bookkeeping is based on. You have two columns in your journal entry. Each will have an equal entry - one for a debit, one for a credit.
- Remember the format of the Accounting Equation where Assets = Liabilities + Owners Equity. The Asset side is the left side of the equation and the Liabilities + Owner's Equity is the right side of the equation. When you need to make a journal entry, refer to your Chart of Accounts to see if the account you need to use falls on the left or right side of the accounting equation.
- If the account is on the Asset or left side, that is the Debit side. A debit will increase those accounts and a credit will decrease them. If the account is on the Liabilities and Owner's Equity or right side, that is the Credit side. A credit will increase those accounts and a debit will decrease them.
Journal Entries when Accounts have Normal Balances
One easy way to remember when to debit and when to credit an account is to remember the normal balances of the five types of accounts on the Chart of Accounts. The normal balance is what the account would have if increases are more than decreases. Here is a list of those accounts and their normal balances. If you remember this list, it will save you a lot of time.
- Asset accounts - debit
- Liability accounts - credit
- Owner's equity - credit
- Revenue accounts - credit
- Expense accounts - debit
As an example, if you are recording an entry to the asset account, you would debit the asset account and credit some other account.
Example of a Journal Entry
Here is an example of a correct journal entry. This example is the journal entry you would make at the start of a new business. If an owner invested $20,000 in a new business, this would be the format of the journal entry. There would be an increase in assets, specifically the cash account, in the amount of $20,000 recorded as a debit and an increase to the owner's equity account would be a credit.
Examples of Common Journal Entries
Here is a list of links to some of the most common journal entries:
- Example of a Journal Entry for a Cash Sale
- Example of a Journal Entry Showing a Credit Sale
- Example of a Journal Entry Showing Discounted Sales
- Examples of Bookkeeping Entries for Inventory Transactions in the Manufacturing Process
- Examples of a Bookkeeping Entry When Selling Inventory for Cash
- Example of a Bookkeeping Entry - Accounts Payable
Here is a very understandable tutorial on when to use a debit and when to use a credit for all five types of accounts. If you have any confusion, take the tutorial and it will help!
Format of Journal Entry
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