An Illustrated Guide to
Accounting Journal Entries
and the General Journal
Accounting Journal Entries are first entered into the General Journal.The General Journal provides a chronological record of transactions that affect the Financial Statements. An entry into the General Journal is called a Journal Entry. To illustrate the process, let's review how Sunny started his business on January 1, 2007, and record those transactions in the General Journal. Jan. 1 Sunny invested $50,000 into his new business, Sunny Sunglasses Shop.Jan. 1 Purchased inventory for $4,500. Paid $3,000 cash, with the balance of $1,500 due in 90 days. Jan. 1 Purchased land for $20,000 with $2,000 as a down payment, and a 15 year mortgage for $18,000. Jan. 1 Purchased insurance for the year for $2,400. Sunny Sunglasses Shop
General Journal
The first column in the General Journal shows the date of the transaction. The second column shows the account debited or credited with a brief explanation. The third column shows a reference to the specific account. When the Accounting Journal Entries are posted to the individual accounts in the next step, a reference is made to the account number to indicate the entries were transferred. These accounts, called "T-Accounts," were briefly discussed in the last part of the introduction section and are detailed in the
General Ledger
section. Finally, the last two columns show the amount of the debit or the credit. - The first transaction represents the owner's investment in the business of $50,000. The investment increases the asset, cash, and Owners Equity by $50,000. Sunny debits cash because increases in assets are recorded as debits. He then credits Owners Equity because increases in equity accounts are recorded as credits.
- The purchase of inventory represents an increase to an asset account for $4,500. Sunny debits cash because increases in assets are recorded as debits. The owner used $3,000 in cash to purchase the inventory, so he credits cash since decreases to assets are recorded as credits. Accounts Payable, a liability, represents inventory purchased on account. Because increases to liabilities are recorded as credits, Sunny credits the balance owed for $1,500.
This Accounting Journal Entry also keeps the Accounting Equation in balance: | Assets Inventory $4,500 and Cash ($3,000) = Liabilities $1,500 + Owner's Equity $0. |
Sunny exchanged $3,000 Cash for $3,000 in Inventory, and purchased $1,500 more Inventory on account. This increased Assets and Liabilities by $1,500. The transaction did not affect Owners Equity, which increases from profits and decreases from losses. - The third transaction, the purchase of land, increased the land, an asset, by $20,000, so Sunny debits land for $20,000. Since he used $2,000 in cash as a down payment, he credits the asset account, cash, for the decrease. The mortgage represents a liability. Because increases to liabilities are recorded as credits, Sunny credits the balance owed of $18,000.
This Accounting Journal Entry also keeps the Accounting Equation in balance: | Assets Land $20,000 and Cash ($2,000) = Liabilities $18,000 + Owner's Equity $0. |
Sunny exchanged $2,000 Cash for a down payment for the land, and mortgaged the balance for $18,000. This increased Assets and Liabilities by $18,000. The transaction did not affect Owners Equity. - Finally, Sunny purchased insurance for the year. Prepaid Insurance is an asset because it represents an insurance policy for one year which is a future benefit to the company not yet consumed. He debits the asset account, Prepaid Insurance, and credits Cash. This affected only one side of the Accounting Equation since he exchanged one asset, Cash, for another asset, Prepaid Insurance.
Sometimes companies use Special Accounting Journals to record Accounting Journal Entries. This occurs when a company has many transactions of a similar nature. The most common Special Accounting Journals are listed below. | Special Journal | Type of Transaction | | Cash Receipts | All Cash Receipts | | Cash Disbursements | All Cash Disbursements | | Sales | All Sales on Credit | | Inventory Purchases | Inventory Purchases on Credit |
Those transactions not included in Special Accounting Journals are then recorded in the General Journal. Though companies may use different types of Accounting Journals, the main focus in the Accounting Cycle is the General Journal.
Click here to review how these Accounting Journal Entries affect the January 1, 2007 Balance Sheet.
Click Here to Navigate to Step Three in the Accounting Cycle: Posting from the Accounting Journal to the General Ledger
Click Here to Return to the Accounting Cycle Main Page.
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