Journal Entries Guide

A guide to understanding Journal Entries

What are Journal Entries in accounting?

In accounting careers, journal entries are by far one of the most important skills to master. Without proper journal entries, companies’ financial statements would be inaccurate and a complete mess.

An easy way to understand journal entries is to think of Isaac Newton’s third law of motion, which states that for every action there is an equal and opposite reaction.

So, whenever a transaction occurs within a company, there must be at least 2 accounts being affected.

For example, if a company bought a car, the company’s assets would go up by the value of the car. However, there needs to be an additional account that changes (i.e. the equal and opposite reaction).

The other account that is affected is the company’s cash going down because they used the cash to purchase the car.

Finally, just like how the size of the forces on the first object must equal that of the second object, so must the debits and credits of every journal entry.

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Journal Entries

 

How to Approach Journal Entries

A journal is the company’s official book in which all transactions are recorded in chronological order. Although many companies use accounting software nowadays to book journal entries, journals were the predominant method of booking entries in the past. In every journal entry that is recorded, the debits and credits must be equal to ensure that the accounting equation (A = L + SE) remains in balance. When doing journal entries we must always consider four factors:

    1. Which accounts are affected by the transaction
    2. For each account, determine if it is increased or decreased
    3. For each account, determine by how much it changed
    4. Make sure that the accounting equation stays in balance

 

The best way to master journal entries is through practice. Here are numerous examples that illustrate some common journal entries. The first example is a complete walkthrough of the process.

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Journal Entry Examples

Example 1 – borrowing money journal entry

ABC Company Borrowed $300,000 from the bank

  • The accounts affected are cash (asset) and bank loan payable (liability)
  • Cash is increasing because we are gaining cash from the bank and bank loan payable is increasing because the company is increasing its liability to pay back the bank at a later date
  • The amount in question is $300,000
  • A = L + SE, A is increased by 300,000 and L is also increased by 300,000, keeping the accounting equation intact

 

Therefore, the journal entry would look like:

 

DR Cash                      300,000

CR Bank Loan Payable          300,000

 

Example 2 – purchasing equipment journal entry

Purchased equipment for $650,000 in cash.

 

DR Equipment            650,000

CR Cash                      650,000

 

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Example 3 – purchasing inventory journal entry

Purchased inventory costing $90,000 for $10,000 in cash and the remaining $80,000 on account.

DR Inventory              90,000

CR Cash                                  10,000

CR Accounts Payable             80,000

 

Example 4 – acquiring land journal entry

Purchased land costing $50,000 and buildings costing $400,000.  Paid $100,000 in cash and signed a note payable for the balance.

 

DR Land                     50,000

DR Buildings              400,000

CR Cash                      100,000

CR Note payable         350,000

 

How to Track Journal Entries

A significant component of accounting involves financial reporting. Financial reporting is the act of presenting a company’s financial statements to management, investors, the government, and other users to make better business decisions.

In order to determine the final monetary value of accounts that are listed on the financial statements on the company’s year end, multiple journal entries are recorded and tracked in an account called a T-account, which is a visual representation of a general ledger account.

The appropriate debits and credits are listed under the appropriate columns under these T Accounts to determine the final value to be reported. Click the link below to learn more about T-Accounts.

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Why do journal entries matter to me and my career in accounting?

Although recording journal entries can be very monotonous and repetitive, recording accurate entries at the right time is imperative for companies to show their correct financial status to not only people within the firm but also to external users.

With inaccurate journal entries, companies may be perceived to be possessing more debt or less debt or as more profitable or less profitable than they actually are. As a result, this could lead to companies and investors to make decisions based on false, misleading information, leading to negative ramifications.

Having the skills to record and understand journal entries is essential in any career in accounting whether you are involved in public practice and are working on a client’s audit file or you are working in the industry and helping to prepare the company’s financial statements.

In simple terms, the first step to proper financial reporting heavily relies on recording accurate journal entries.

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More resources

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