Journal Entries

A journal entry is how accountants write down what happened. This guide shows you how to build one step by step (which accounts, debit or credit, and why debits must equal credits), how entries flow into the ledger and the trial balance, a cheat sheet of the most common entries, and a practice problem to try yourself.

Section I. What is a Journal Entry?

Think of an old fashioned journal, one where you write about what happened during your day. In your journal, you write about events in the order that they occur. The same goes for journals in accounting. An accounting journal records accounting events in chronological order, with every new event requiring a new journal entry. So you can see that the word journal in accounting is pretty much the word journal in the real world: a daily record of events.

Because accounting is a double-entry system, every event requires at least two accounts to be affected to keep everything in balance. Imagine for a moment a very simple math equation:

Easy enough, right? This equation is said to be balanced, meaning that the value on the left of the equation is equal to the value on the right: 10. Numbers can be added to the equation as long as we keep it balanced. For example:

In this case, we’ve added one to each side but kept the equation in balance. This extremely simplistic example illustrates a salient point for accounting: the accounting equation must stay in balance. The accounting equation is the basis of the double-entry accounting system:

This equation must always be balanced, the left side must always equal the right. Now taking our simple example from above and applying it to the accounting equation: if assets increase by 1, liabilities or shareholder’s equity must also increase by 1.

Additionally, assets could increase by 1 and decrease by 1. It will still balance:

Now that you know the underlying fundamentals, let’s turn to journal entries. To form a proper journal entry, there are several basic rules that must be followed. But first, let’s look at a simple example so we know where to begin:

In this example, a company buys equipment for $1,000 cash. The purchase of the equipment is the event that drives the entry.

▶ Watch the videoThe Accounting Equation (4 min)

Section II. Where to Start?

The best place to start is by determining which accounts are being affected. The journal entry is formed around those account names, or titles. Look at the given example and think logically what will have changed after the transaction has completed. With the previous example in mind, after a company buys equipment they should, logically, have more equipment. Therefore we know we are going to have to change the "Equipment" account in order to reflect the new purchase. Continuing, the company paid cash for the equipment. If cash is paid, we no longer have that cash and must adjust the "Cash" account to reflect the decrease. So in the previous example, the accounts being affected are the "Equipment" account and the "Cash" account.

Once you know which accounts are being affected, the next step is to determine whether they are being debited or credited. (I'm assuming here a basic knowledge of debits and credits. If debit and credit still feel fuzzy, remember that debit just means left and credit just means right.) All accounts that are being debited should be aligned on the left, with no indentation. Credits are distinguished by being indented or "pushed out" to the right. All debits should be aligned, and all credits should be aligned.

In the example above, we have identified the "Equipment" account as the debit (assets increase with debits) and the "Cash" account as the credit (assets decrease with credits). Therefore, the "Equipment" title goes flush on the left side and the "Cash" title is indented to the right, indicative of a credit.

Here's what a complete entry looks like on paper, with each piece labeled:

Put all of that together and every journal entry comes down to the same handful of steps:

1. Picture what really happened. A journal entry is just a representation of an event in the real world.
2. Find the accounts. What changed? More equipment, less cash, a new loan?
3. Decide up or down. Did each account increase or decrease?
4. Turn that into debits and credits. Assets increase with debits, liabilities and equity increase with credits, and so on.
5. Write it out. Debits first and flush left, credits after and indented.
6. Check that it balances. Total debits must equal total credits.

▶ Watch the videoDebits and Credits (7 min)

Section III. A Balancing Act

An extremely important thing to remember when preparing journal entries, and with accounting in general, is that the debits must always equal the credits. They must balance. Note here that the dollar value of the debits must always equal the dollar value of the credits. In our example, the debits and credits are both $1,000. Good so far.

Changing the example slightly, assume the company pays $200 down and signs a loan for the remainder ($800).

Notice now that there is only one debit (Equipment, 1000) and there are two credits (Cash, 200; Note Payable, 800). Is this a problem? Shouldn’t debits and credits be equal? Yes, they should. But what must be equal is the dollar value of the debits and credits, not the number of debits and credits. The accounting equation still balances, because the value of the debits and credits is equal.

In this modified example, the total dollar value of the debits and credits balances at $1,000 each. Regardless of the number of accounts used, the sum of the debits must equal the sum of the credits.

Section IV. Common Journal Entries

You'll see the same transactions over and over in an intro class. Don't memorize this table. For each row, picture what happened and convince yourself why each account goes up or down, and you'll be able to work out any entry the test throws at you.

A couple of notes. Some books debit Retained Earnings directly for dividends instead of using a Dividends account; either way, equity goes down. And not every event gets a journal entry. Hiring someone or signing a contract for work you'll do next month doesn't change any account yet, so there's nothing to record until something actually changes the accounting equation.

Section V. What Happens Next?

Now that the journal entry is complete, what is the next step? After the event has been journaled, it is posted to the appropriate account in the General Ledger. Whereas the General Journal records journal entries chronologically by event, the General Ledger records total balances by account. Posting items to the General Ledger requires no decision making, as all the decisions were made when creating the original journal entry.

Taking the original example:

To post this to the General Ledger simply requires taking the account names ("Equipment" and "Cash") and entering the dollar values on the appropriate side (debit or credit). Accounts are visualized using a t-chart, as shown below.

The process of posting to the General Ledger is fairly mechanical. To post our original example from above, take the first account title ("Equipment"), the dollar value ($1,000), and whether it is a debit or credit (debit). Then fill in the sample t-chart from above with the proper information. For cash and equipment:

It may be hard to see from this simplistic example, but what the t-account gives you is a bird’s eye, snapshot view of an account. For example, at the end of the year the "Cash" account may look like the following:

Now that more events have taken place during the year, the "Cash" account starts to have more entries. On the left (debit) side are all the increases and the right (credit) side holds all the decreases. At the very bottom, the $34,200 is the ending balance of the "Cash" account, found by adding all the debits and subtracting all the credits. The t-account view makes it much easier to quickly see what happened during the year rather than looking at every event in the General Journal.

▶ Watch the videoT-Accounts (4 min)

The Trial Balance

The last stop is the trial balance. It's kind of like a balance sheet, but it's not a financial statement. It's every account in the ledger lined up in one list, with each balance in a debit or credit column, to test one thing: do total debits equal total credits? Here's a small one:

If every journal entry balances, the trial balance will balance, because the journal entries are the source of everything in it. If it doesn't balance, something went wrong along the way, most likely a journal entry that didn't balance or an amount posted to the wrong side.

▶ Watch the videoThe Journal, Ledger, Trial Balance (14 min)

Section VI. Summary

A journal entry is the recording of a financial event in the accounting journal. Events are recorded chronologically. The first step in preparing a journal entry is to determine the accounts affected. Once the accounts have been determined, the next step is to decide how much each account is being affected and whether that amount is a debit or a credit. With account names and debits/credits being decided, the journal entry begins to take shape. Debits are written first, flush to the left, followed by credits, indented to the right. It is imperative that the dollar values of the debits/credits for every journal entry be in balance. Once the journal entry is formed, it is a simple matter of posting the same amounts to the t-accounts in the General Ledger for summary viewing, and listing the ledger balances in a trial balance to check that debits equal credits.

Section VII. Try One Yourself

Show the answer

1. Issued stock

Cash	15,000
Common Stock	15,000

2. Bought equipment

Equipment	6,000
Cash	2,000
Notes Payable	4,000

3. Bought supplies on account

Supplies	400
Accounts Payable	400

4. Provided services

Cash	1,500
Accounts Receivable	2,000
Service Revenue	3,500

5. Paid wages

Wages Expense	900
Cash	900

6. Paid the supplier

Accounts Payable	400
Cash	400

7. No entry. Signing the contract doesn't change any account. You haven't done the work or received any cash yet, so there's nothing to record until next month.

Now post the Cash lines to a T-account: debits of $15,000 and $1,500, credits of $2,000, $900, and $400.

Cash
15,000	2,000
1,500	900
	400
13,200

Account	Debit	Credit
Cash	13,200
Accounts Receivable	2,000
Supplies	400
Equipment	6,000
Notes Payable		4,000
Common Stock		15,000
Service Revenue		3,500
Wages Expense	900
Total	22,500	22,500

Accounts Payable went up $400 and back down $400, so it has a zero balance and drops off the trial balance. Debits equal credits at $22,500, so everything balances.

Keep Going More Practice

• Journal Entry - Sales: record a sale that is part cash, part on account.
• Journal Entry - Inventory: buy inventory with some cash and the rest on account.
• The Effect of Journal Entries: match thirteen everyday transactions to their two effects.
• Land Purchased With Cash: what one entry does to assets and net income.
• What Should Be Journaled: decide which events need a journal entry at all.
• The Journal, Ledger, Trial Balance: the whole journal, ledger, and trial balance flow on video.