What is a Journal Entry in Accounting
In accounting, a journal entry is a record of a business transaction in an organization’s accounting system. The first step in the accounting cycle is a journal entry. Journal entries are the foundation of the double-entry accounting technique, which has been used to maintain financial records for decades. They make it easier to track what a company’s resources have been used for and where those resources come from.
Every business transaction should be recorded in at least two places, as per the logic of a journal entry (known as double-entry accounting). When you make a cash sale, for example, you increase both the income and cash accounts. Alternatively, if you buy products on credit, this increases both the accounts payable and inventory accounts.
What Is Included in a Journal Entry?
- Identify the accounts involved in the transaction
- Determine the nature of accounts
- The rule for debit and credit for each of the accounts involved
- Determine which accounts should be debited and which should be attributed.
- In the date column, enter the date of the transaction.
- Write narration within brackets in the next line in the particular column
- Draw a line across the entire particular column to separate one general entry from the other.
Rules for Journal Entries:
Students should consider the following main points:
- Unless otherwise instructed, assume that all transactions for the purchase or sale of products on credit when a personal name or the name of a company is listed in the question are on credit.
- No need to mention the name of the buyer or seller in case of a cash purchase or cash sale, money is simply exchanged for goods handed over
- Cash purchases, cash sale and all transaction where the word paid is mentioned are obviously cash transactions.
- When commodities are purchased or sold for cash, the name of the supplier or customer is irrelevant and should be overlooked when recording the transaction.
- Return of goods by customer (sales return) is recorded in the sales return and allowances account or sales return account.
- Return of goods to the supplier (purchase return) is recorded in the purchase return and allowance account or purchase return account.
What are Debit and Credit?
Every transaction or event has two aspects known as Debit and Credit. Debits and credits are used in bookkeeping to ensure that a company’s books balance. In accounting, debit refers to the left side of any account, and credit refers to the right side.
Debits add to asset or expense accounts and decrease liability, income, or equity accounts. Credits work in the opposite direction. Every debit entry must be accompanied by a credit entry for the same dollar amount when recording a transaction, and vice versa.
Rules of Debit and Credit
A consolidated list of rules of Debit and Credit is given below:
|Revenue or Income||Credit||Debit|
Journal Entry Format:
The journal Entry format has five Columns:
Date: in this column, the date of the transaction is written as the year and the month is written on the top one till they change.
Particulars: In this column, the name of the accounts to be debited and credited are written. The account to be debited is written first and after leaving some space in the second line the account to be credited is written, preceded by the word “To” each entry a brief description of the transaction called narration is given in the particular column.
Ledgers Folio: In this column, the number of the page where its posting is done in the ledger or subsidiary books is written.
Debit: The amount to be debited is written in this column.
Credit: The amount to be credited is written in this column.
For the month of month, date year
|(Description of a transaction)|
Accounting Journal Entry Example:
Journalize the following transactions:
1. Mr. A started his business with $50000
2. Purchased goods for $35000
3. Sold goods for $48000
4. Purchased goods from Mr. B on credit for $6000
5. Sold goods from Mr. B on credit for $7000
6. Purchase office furniture for $12000
7. Paid salary to staff by cheque for $9000
8. Withdrew from bank for private use for $1500
For the month of month, date year
|Capital (Mr. A)||$50000|
|(To record Mr. A started a business by investing cash)|
|(To records purchased goods on cash)|
|(To record sold goods on cash)|
|Account Payable (Mr. B)||$6000|
|(To record purchased goods on credit)|
|5||Account Receivable (Mr. C)||$7000|
|(To record sold goods on credit)|
|(To record pursed office furniture on cash)|
|(To record paid salaries to staff by cheque)|
|To record, the owner withdraw cash from the bank for personal use|
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