Complete Guide to Journal Entries
Master the art of recording business transactions through journal entries. This comprehensive guide covers everything from basic entries to complex adjusting entries, with numerous examples and practice problems.
Learning Objectives
- ✓Record basic business transactions accurately
- ✓Apply debit and credit rules consistently
- ✓Prepare compound journal entries
- ✓Understand and record adjusting entries
1. Journal Entry Format and Rules
A journal entry includes: the date, account titles, debit amounts (listed first, left-aligned), credit amounts (listed second, indented), and a brief description. Debits must always equal credits. The first line(s) are debits, followed by credit line(s). Each entry should have enough description to understand the transaction.
Key Points
- •Date goes at the top of each entry
- •Debit accounts listed first
- •Credit accounts indented below
- •Debits must equal credits
2. Debit and Credit Rules (DEALER)
Use DEALER to remember which accounts increase with debits: Dividends, Expenses, and Assets. Liabilities, Equity, and Revenue increase with credits. When an account increases, you use its normal balance side. When it decreases, you use the opposite side.
Key Points
- •D-E-A increase with debits
- •L-E-R increase with credits
- •To decrease an account, use the opposite side
- •Normal balance is the side that increases the account
3. Common Business Transactions
Common transactions include: receiving cash from customers (debit Cash, credit Revenue or A/R), paying expenses (debit Expense, credit Cash or A/P), purchasing assets (debit Asset, credit Cash or A/P), and borrowing money (debit Cash, credit Notes Payable). Always think about what is received and what is given up.
Key Points
- •Cash received = debit Cash
- •Cash paid = credit Cash
- •Revenue earned = credit Revenue
- •Expense incurred = debit Expense
4. Adjusting Journal Entries
Adjusting entries are made at period-end to ensure revenues and expenses are recorded in the correct period (accrual accounting). Types include: accrued revenues (earned but not yet received), accrued expenses (incurred but not yet paid), deferred revenues (received but not yet earned), and prepaid expenses (paid but not yet used). Also includes depreciation.
Key Points
- •Made at end of accounting period
- •Ensure proper matching of revenues and expenses
- •Accruals record what happened but wasn't recorded
- •Deferrals adjust what was recorded before it happened
5. Compound Journal Entries
A compound entry involves more than two accounts. For example, purchasing a $50,000 vehicle with $10,000 down and $40,000 financed: Debit Vehicle $50,000, Credit Cash $10,000, Credit Notes Payable $40,000. The key is that total debits still must equal total credits.
Key Points
- •More than two accounts in one entry
- •Common in complex transactions
- •Total debits must still equal total credits
- •Keeps related transaction elements together
High-Yield Facts
- ★Never mix up expense vs. asset: Prepaid Rent is an asset until used, then becomes Rent Expense
- ★Cash basis vs accrual basis: Journal entries for the same transaction differ based on method
- ★Closing entries transfer temporary accounts (Revenue, Expenses, Dividends) to Retained Earnings
- ★The journal is the book of original entry; the ledger organizes by account
- ★Source documents (invoices, receipts) support journal entries
Practice Questions
1. Record: Paid $5,000 rent in advance for the next 5 months.
2. Record the adjusting entry: One month of the prepaid rent has been used.
3. Record: Received $3,000 from a customer for services to be performed next month.
FAQs
Common questions about this topic
Start with what you know. If cash increased, debit Cash. If cash decreased, credit Cash. Then figure out what the other side must be based on the nature of the transaction.
Ask: Will this benefit future periods? If yes, it's an asset (capitalize it). If the benefit is only for the current period, it's an expense. Prepaid items are assets until used.