How To Do A Journal Entry

12/30/2014
HowtodoaJournalEntry
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How to do a Journal Entry

OK soldiers. Time to do some real accounting!
Everything we do from this point on will be stuff that

and bookkeepers are doing in their offices at this ver
means this lesson will be a little more technical than
Dont let that spook you though. Youll be surprised a
can be! Now would be a good time for us to lay out t
accounting process:
Youll notice the above diagram shows the first step as Source Documents. Source documen
as receipts , invoices, bank statements and credit card statements that are collected during th
have all the information we need when the time comes for us do our accounting. Obviously i
wont be asking you to go out and collect invoices and receipts, so well conveniently skip th
The next step is entering journals. Every time a transaction occurs, its recorded using a
A journal entry is simply a summary of the debits and credits of a transaction. Journal entries
because they allow us to sort our transactions into manageable data. Imagine having a large
and invoices from different shops, suppliers and customers. All the information you need is t
useless when its all messed up like that! Journal entries help us sort all this into meaningful i
http://www.guru99.com/journalentries.html
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Heres what a typical journal entry looks like:

Transaction: Pay an expense of $100.
Journal entry:
Dr
Expense
$100
Cr
Bank
$100
Lets take a look at what this means.

First of all, Dr and Cr are simply abbreviations for Debit and Credit.
Every single transaction consists of two movements: a debit movement and a credit m
careful not to confuse this with the debit and credit sides. These are two different things.
Debit and credit movements are used in accounting to show increases or decreases in our ac
instead of saying there has been an increase or a decrease in an account, we say there has b
movement or a credit movement.
For example, in the previous lesson we learned to show the above transaction like this:
DEBIT SIDE
CREDIT SIDE
Account
Amount
Expense
+$100
Bank
-$100
Account
Amoun
Now, instead of showing these as pluses and minuses, we will show them in a journal entry a
movements and credit movements:
Dr
Expenses
$100
Cr
Bank
$100
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The nature of each movement is explained below:

DEBIT SIDE
CREDIT SIDE
(Assets, Expenses, Drawings)
(Liabilities, Revenue, Owners Equity
Increase
Debit movement
Credit movement
Decrease
Credit movement
Debit movement
Lets apply this to our example:
When we pay expenses that means our expenses have increased. Also, when we pay expense
account is obviously going to go down.
So in summary we need to record a transaction that will increase expenses and decrease ban
Referring back to our matrix, we can see that to increase expenses we require a debit movem
DEBIT SIDE
CREDIT SIDE
(Liabilities, Revenue, Owners Equit
Increase
Debit movement
Credit movement
Decrease
Credit movement
Debit movement
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We can also see that decreasing our bank requires a credit movement:
DEBIT SIDE
CREDIT SIDE
(Liabilities, Revenue, Owners Equit
Increase
Debit movement
Credit movement
Decrease
Credit movement
Debit movement
Hence our journal entry will involve a debit movement to expenses, a credit movement to ba
before:
Dr
Expenses
$100
Cr
Bank
$100
Now its your turn. Have a go at writing journal entries for the transactions weve had in the p
The first one has been done for you.
Bank
Rent
Loan
DEBIT SIDE (Assets,

Expenses,
Service Income
CREDIT SIDE
(Liabilities,
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Drawings)
Rent
Increase
Bank
Decrease
Revenue, Owners
Equity)
Loan
Rent Increased so
Debit movement
Bank Decreased so
Credit movement
Service Income
Transaction 1: You decide to start a business. To start the business off, you deposit $10,000
into the business bank account.
Dr
Cr
$10000
$-10000
$10000
$-10000
Dr
Bank
Cr
Owners Equity
PERFECT!
Transaction 2: You buy your trusty iPhone off eBay for $500
Dr
Cr
$500
$-500
$500
$-500
Cr
Bank
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Dr
iPhone
PERFECT!
Transaction 3: You take out a business loan of $10,000.
Dr
Cr
$10000
$-10000
$10000
$-10000
Cr
Loan
Dr
Bank
PERFECT!
Transaction 4: You put another $5,000 of your own money into the business.
Dr
Cr
$5000
$-5000
$5000
$-5000
Dr
Bank
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Cr
Owner's Equity
PERFECT!
Transaction 5: You pay back $1,000 of the loan (no interest).
Dr
Cr
$1000
$-1000
$1000
$-1000
$1500
$-1500
Dr
Loan
Cr
Bank
PERFECT!
Transaction 6: You purchase a computer for $1,500.
Dr
Cr
$1500
$-1500
Cr
Bank
Dr
Computer
PERFECT!
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Transaction 7: You purchase your Bakemaster Oven for $2,000
Dr
Cr
$2000
$-2000
$2000
$-2000
Dr
Oven
Cr
Bank
PERFECT!
Transaction 8: You buy some cake mix for your store for $3,000
Dr
Cr
$3000
$-3000
$3000
$-3000
Cr
Bank
Dr
CakeMix
PERFECT!
Transaction 9: You pay interest on the loan of $1,000
Dr
Cr
$1000
$-1000
$1000
$-1000
Dr
Interest
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Cr
Bank
PERFECT!
Transaction 10: You sell a box of cakes for $1000.
Dr
Cr
$1000
$-1000
$1000
$-1000
Dr
Bank
Cr
Sales
PERFECT!
Transaction 11: You pay your telephone bill of $300
Dr
Cr
$300
$-300
$300
$-300
Cr
Bank
Dr
Telephone Expense
PERFECT!
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Transaction 12: You sell another box of cakes for $2,000
Dr
Cr
$2000
$-2000
$2000
$-2000
Cr
Sales
Dr
Bank
PERFECT!
Transaction 13: Your computer breaks. You pay a repairman $50 to fix it.
Dr
Cr
$50
$-50
$50
$-50
Cr
Bank
Dr
Repairs
PERFECT!
Transaction 14: As the owner of the business, you withdraw $1,000 in cash for a personal ho
Dr
Cr
$1000
$-1000
$1000
$-1000
Cr
Bank
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Dr
Drawings
PERFECT!
Transaction 15: You purchase a car from Johns Car Shop for $3,000. You purchase the car on
you will pay for it in full next month.
Dr
Cr
$3000
$-3000
$3000
$-3000
Dr
Car
Cr
Johns Car Shop
PERFECT!
Congrats! Weve just prepared journal entries from our business transactions. This is the first
a set of financial statements. In the next lesson, well enter these journals into ledgers.
What is the difference between the debit and credit side and debit and credit movements?
Debit side
Credit Side
The debit side is the left side of the accounting

equation.
The credit side is the right side of the a

equation.
The accounts of the debit side are ASSETS,

EXPENSES AND DRAWINGS. These are known as
debit accounts.
The accounts of the credit side are LIA

REVENUE AND OWNERS EQUITY. Thes
credit accounts.
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For every transaction that occurs, two accounts will change. These two changes are known as
movement and a credit movement. The effects of these movements are shown below.
Debit movements
Credit movements
Increase the debit side
Increase the credit side
Decrease the credit side
Decrease the debit side
It is important you do not think of debit movements and credit movements as pluses and m
and bad. This line of thinking is incorrect. Using the above chart you can see that a debit mo
ability to both increase and decrease an account, as does a credit movement.
Therefore try and focus on the actual effect each movement has on the different accounts.
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How To Do A Journal Entry

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12/30/2014

How to do a Journal Entry

Everything we do from this point on will be stuff that

Heres what a typical journal entry looks like:

Lets take a look at what this means.

The nature of each movement is explained below:

(Assets, Expenses, Drawings)

(Liabilities, Revenue, Owners Equity

Lets apply this to our example:

(Assets, Expenses, Drawings)

(Liabilities, Revenue, Owners Equit

(Assets, Expenses, Drawings)

(Liabilities, Revenue, Owners Equit

DEBIT SIDE (Assets,

Transaction 7: You purchase your Bakemaster Oven for $2,000

Transaction 12: You sell another box of cakes for $2,000

The debit side is the left side of the accounting

The credit side is the right side of the a

The accounts of the debit side are ASSETS,

The accounts of the credit side are LIA

Increase the debit side

Increase the credit side

Decrease the credit side

Decrease the debit side

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