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Examples of General Journals

In the previous lesson, we learned about the general journal and how to capture economic events. Let's try an easy example using this simple system. Some transactions are routine and happen very frequently. It helps to know these, because they represent 99% of the total journal entries a company will make. All companies earn some sort of revenue, so let's look at a sale transaction:

March 20, the company made a cash sale for $100.

  1. Is Cash used in this transaction? Yes.
  2. Was Cash received or paid? Received. [Increase = Debit Column]

Enter the Cash portion of the journal entry.

Date Account Debit Credit
  Mar-20  Cash  $100   
       
       

The date always starts a journal entry. Enter the month once on a page, and put the day in front of each journal entry on the page, even if they are all on the same date. The day indicates the beginning of a new journal entry. You should also leave one or two blank lines between journal entries on a page.

3. Enter the balancing dollar amount in the opposite column from Cash.

Date Account Debit Credit
  Mar-20  Cash $100  
     
$100 
       

Almost done....

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is a sale, so we will use Sales Revenue for the Credit side of the journal entry.

Date Account Debit Credit
  Mar-20  Cash $100  
      Sales Revenue   $100
       

The journal entry is in balance, and is complete. The textbook will show that a memorandum can be entered on the line below the journal entry. This should be additional information that is not contained in the journal entry itself; information that will be useful when trying to reconstruct events at a later date.

Another example. April 1, the company paid rent $500.

  1. Is Cash used in this transaction? Yes.
  2. Was Cash received or paid? Paid. [Decrease = Credit Column]
    • Enter the Cash portion of the journal entry
  3. Enter the balancing dollar amount in the opposite column as Cash.
Date Account Debit Credit
  Apr-1   $500  
     Cash   $500
       

Note that it is customary to enter the debit part first, and the credit entry second. The credit entry account title is indented, to help set it off from the debit account titles. These practices are used to make the journal entry easier to read, and reduce errors in posting.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of paying an expense, in this case Rent Expense.

Date Account Debit Credit
  Apr-1 Rent Expense $500  
     Cash   $500 
       

Another example...without cash. April 20, the company opens a charge account at Office Emporium. They buy a $1000 computer, and say "charge it!"

  1. Is Cash used in this transaction? No. [We will use the substitution method]
  2. If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]
    • Enter the "cash" portion of the journal entry. Pencil "cash" in lightly, you will replace it later with the correct account title
  3. Enter the balancing dollar amount in the opposite column.
Date Account Debit Credit
  Apr-20   $1000  
  cash   $1000
       

Notice that I have roughed in the structure of the journal entry, but the actual accounts have not been entered yet.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of buying equipment, in this case we will use the account Office Equipment.

5) Refer to the Chart of Accounts and replace "cash" with the appropriate account, which will usually end with "Payable" or "Receivable" such as Accounts Payable, Interest Receivable, etc.

In this case we will use Accounts Payable, one of the most frequently used accounts. Accounts Payable is used to refer to most of the common, day-to-day debts and current liabilities that a company incurs. It is short-term debt, meant to be paid soon, like the phone bill, utility bill, etc.

Date Account Debit Credit
  Apr-20 Office Equipment $1000  
     Accounts Payable   $1000
       

These are all examples of simple journal entries. There is one debit and one credit. Some transactions might involve more then two accounts, and we would use three or more lines to write those entries. These are called compound journal entries (or complex journal entries). There is no limit to the number of debit or credit accounts that can be included in a journal entry. All necessary accounts will be used. The journal entry will balance, regardless of the number of accounts used.

Let's try an example of a compound journal entry. June 5, the company buys building and land for $100,000. They make a down payment of $20,000 and sign a mortgage note with their bank for the balance. An appraisal shows the land alone has a value of $10,000.

  1. Is Cash used in this transaction? Yes & No. [We will use the substitution method along with Cash]
  2. If Cash were used...Would it be received or paid? Paid. [Decrease = Credit Column]
    • Enter the Cash portion of the journal entry. We will use Notes Payable to enter the $80,000 we borrowed from the bank, on its own line, but on the same side as Cash - the Credit side in this case.
Date Account Debit Credit
June-5     
       
     Notes Payable   $80,000
     Cash   $20,000

3) Enter the balancing dollar amount in the opposite column.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. I left 2 blank lines above, because I knew we had both land and a building, which must be entered separately.

Date Account
Debit
Credit
June-5 
Land $10,000   
  Building $90,000  
     Notes Payable   $80,000
     Cash   $20,000
    -------- --------
Total $100,000 $100,000

In this example I have totaled the columns to show that the journal entry is in balance. In real accounting systems a total is only drawn at the bottom of the page, not after each journal entry.

Here's another example of a compound journal entry. This one also shows how to record the issue of common stock, a very important journal entry to know. On May 1, Bill, Bob and Quinn create a new corporation, BBQ, Inc. They raise capital in the company by selling 10,000 shares of Common Stock for $5 per share. The common stock has a Par value of $1 per share.

  1. Is Cash used in this transaction? Yes. The organizers are raising initial capital to start a new company. If the stock were sold on a stock exchange this would be referred to as an IPO (Initial Public Offering).
  2. If Cash were used...Would it be received or paid? Received. [Increase = Debit Column]
    • Enter the Cash portion of the journal entry. They sold 10,000 shares of stock at $5 per share, so they have raised 10,000 x $5 = $50,000.
Date Account Debit Credit
May-1  Cash  $50,000  
     

3) Enter the balancing dollar amount in the opposite column.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. Common stock is recorded as a credit to the Common Stock account. It is recorded at Par value, in this case $1 per share. So 10,000 x $1 = $10,000.

Date Account Debit Credit
May- Cash  $50,000  
      Common Stock   $10,000
       

The journal entry is out of balance and we need to finish it up. Any excess raised by the sale of stock is credited to the Additional Paid-In Capital account.

Date Account Debit Credit
May-1  Cash   $50,000   
      Common Stock   $10,000
     Additional Paid-In Capital   $40,000

This is a good example of an important journal entry every accountant and bookkeeper should know. We don't use it very often, but it's important to know how to make this type of journal entry.

A Word About Issuing Stock

Each state has slightly different laws regarding corporations. Most states permit Par value stock, and some have a Legal Capital rule, forcing corporations to maintain tangible capital equal to the Legal Capital. This is in place to protect stockholders. Some states permit No-Par stock.

States also allow Preferred stock, which pays a fixed dividend, similar to an interest-bearing investment. Preferred stock usually has a Par value, and is recorded as in the example above, except the Preferred Stock account is used. Some company's maintain a separate account Additional Paid-In Capital on Preferred Stock, but Additional Paid-In Capital usually reverts to the Common stockholders, regardless of it's source.

Posting to the Ledger

Journal entries must be posted to the Ledger accounts on a regular basis. In many computer based systems this is done automatically, when journal entries are made. In a manual system, and some computer systems, the journal entries are posted on a daily, weekly or monthly basis, called "batch posting."

When you Post, you simply take each line from the journal entries, and transfer the amounts to the corresponding Ledger accounts. You have to be very careful to post all journal entries, get the dollar amounts right, and enter them in the correct column of the correct account. Needless to say, in a manual system errors do get made.

Posting is actually a routine and mechanical procedure.

Using T-Accounts

You may see examples of T-Accounts in accounting textbooks. A T-Account is just a simple way to represent a Ledger account. It's handy for accounting students, because you can make quite a few T-Accounts on one page, and post journal entries quickly. This makes it easier to do homework assignments or analyze transactions.

Some homework assignments will only use a few accounts, and there will only be one or two entries to each account. You can make three T-Accounts across a page, and several rows down the page. The Cash account should be larger than the rest, since it will have quite a few entries in most assignments.

When you post to T-Accounts, make a large T and write the name of the account above it. Write the Debit entries on the left half of the T, and Credit entries on the right side of the T. You can draw a line underneath the entries, net all the entries together, and put the balance on the correct side of the T below the line.

The Income Statement

The Income Statement:
Relates to a period of time.
Revenue - the price of your goods and services
Expenses - costs incurred in earning revenue
Net Income - the excess of Revenue over Expenses, on the Income Statement
Net Loss - the excess of Expenses over Revenue, on the Income Statement
Net Income is synonymous with Net Profit.
Debit and Credit Rules
Revenues = Credit Entry
Expenses = Debit Entry

All revenue and expense entries follow these simple rules. The opposite side entry is usually made only to correct an error in an earlier journal entry. This is true of all income statement accounts.

Many balance sheet accounts tend to increase and decrease on a regular basis. Cash, Inventory, Accounts Receivable, Supplies, Accounts Payable all change on a frequent basis. Income statement accounts only increase, and do so according the the rules above. It is really easy to remember this simple rule.

Revenue

Example February 3, the company makes a credit sale of $250.

Date Account Debit Credit
  Feb-3 Accounts Receivable $250  
     Sales Revenue   $250
       

Expenses

Example February 5, the company makes a cash sale of $250.

Date Account Debit Credit
  Feb-5 Cash $250  
     Sales Revenue   $250
       

These two entries are almost identical. Notice that Sales Revenue is on the Credit side in both entries. Remember this and it will make all your journal entries easier. When you record a revenue you will put it on the Credit side.

Expenses

Example February 1, the company pays rent, $500.

Date Account Debit Credit
  Feb-1 Rent Expense $500  
     Cash   $500
       

Example February 5, the company has an service company clean their office every week. The fee is $100 each week, and the bill is paid at the end of the month. This is the first time the office has been cleaned this month.

Date Account Debit Credit
  Feb-5 Office Expense $100  
     Accounts Payable   $100
       

These are both examples of an Expense entry. The expense part is always in the Debit column. You will list it first, and then either Cash or Accounts Payable. An entry to record Payroll Expense would credit Wages Payable. An entry to record Interest Expense would credit Interest Payable. These are special payable accounts. Most common business expenses will credit Accounts Payable or occasionally Cash.

When to record Revenue

Realization Principle - at the time goods are sold or services are rendered.

When to Record Expenses

Matching Principle - offsetting expenses against revenues in the appropriate time period. For instance, the bill for June's long distance phone calls is paid in July. The long distance expense should show up on the June income statement.