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.

1. The owner invested Rs. 30,000 cash in the corporation. We analyzed this transaction by increasing both cash (an asset) and common stock (an equity) for Rs. 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 Rs. 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 Car for Rs. 8,500 cash. We analyzed this transaction as increasing the asset Car 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

Car 8,500

Cash 8,500

4. Purchased Rs. 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 Rs. 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 debit.

Debit               Credit

Accounts Payable 300

Cash 300

6. Paid February and March Rent in advance for Rs. 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 Rs. 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 Rs. 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 Rs. 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 Rs. 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 Rs. 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.