How to Record Accounting Journal Entries
Lesson 3 in the Basic Accounting series:
Learning how to record accounting journal entries is the foundation of any business accounting course.
If you are a student, small business owner, or just wanting to brush up on your accounting skills, understanding the basic accounting concepts of debits and credits and double entry accounting will be the first step you want to take in building your accounting skills.
Step 1 - Recording Accounting Journal Entries with Debits and Credits:
- In a double entry accounting system (used by most businesses) every business transaction is recorded in at least two accounts. (Learn more about double entry accounting in ourbookkeeping section)
- One account from your small business chart of accounts will be debited which simply means the amount will be recorded on the left side and one account will be credited…amount recorded on right side.
- Debits and credits must balance equal.
- See more about debits and credits in our basic accounting concepts section.
Step 2 - Journalizing
Note: Today most accounting is done on computers and the journalizing (recording accounting journal entries) is done in the background; however, it is still important to know the basics of double entry accounting.
- In manual accounting each financial transaction is first recorded in a book called a journal.
- In that accounting journal entry the title of the account to be debited is listed first, followed by the amount to be debited. The title of the account to be credited is listed below and to the right of the debit, followed by the amount to be credited.
- To determine which account is debited and which is credited you have to first determine what kind of account is being affected and if it was increased or decreased.
Step 3 - Recording Accounting Journal Entries using the Accounting Equation:
- To determine which account is debited and which is credited memorize this basic accounting equation (the foundation of all basic accounting concepts):
Assets = Liabilities + Owner’s Equity
- Assets are on the left side or debit side and asset accounts such as Cash have their normal balances on the left side.
- Liabilities and Owner’s equity are on the right side or creditside and their accounts in the general accounting ledger have their normal balance on the right side.
Okay...here’s where it gets a little complicated...but keeping the above equation in mind makes it a lot easier to understand:)
Step 4 - Recording Accounting Journal Entries: Increase or Decrease?
- To record a business transaction in an accounting journal entry, we need to look closely at the transaction and see which accounts it involves and if it increased or decreased those accounts.
- If it involved an asset account such as Cash, you would picture that basic accounting equation above and know that its normal balance is on the left side (debit side), so if we received (increase) cash we would record the amount on the left side.
- However, if it decreased our asset account such as paying our small business bills, we would record it on second line and on the right side to show a decrease in that account.
- If the business transaction increased our liabilities or owner’s equity we would record it on the right side ( credit side) because those balance sheet accounts have a normal credit (right) balance. (Remember that equation?)
- If the transaction decreased our liabilities or owner’s equity we would record it on the left side ( debit side).
- To sum it up—remembering the basic accounting equation: increase a balance sheet account by recording the amount on the same side as its on in the equation; decrease it by recording amount on the opposite side.
- For income statement accounts such as revenue (income) and expenses, you just need to remember revenue accounts have a normal right credit balance. (Easy for me to remember—Revenue increases owner’s equity and has the same normal “credit” balance)
- So following the rules above—when you increase your revenue account, you would record the amount on its normal credit (right) side and to decrease it you would record the amount on the debit (left )side.
- Expenses have a normal debit (left) balance. To increase your expense account, you would record the amount on its normal debit (left) side and to decrease it you would record the amount on its opposite (credit) side. Tip: Expenses are almost always debited!
Step 5 - Practice Recording Accounting Journal Entries:
The best way to learn something is to do it...so let’s study some accounting journal entry examples:
Jane and Bob open their brand new store selling thingamajigs. They invest $15,000 into their new business; rent a building, and start selling their merchandise.
Examples of their accounting journal entries for the first month:
Account Names & Explanation
Jane and Bob deposit $15,000 in their new business bank account.
Debit: increase in asset (cash)
Credit: increase in owner’s equity
Paid first month's rent of $1700.
Debit: increase in expenses (rent)
Credit: decrease in asset (cash)
Thingamajig Material - Inventory
To make their thingamajigs Jane purchased $4000 in thingamajig materials on credit.
Debit: increase in assets (inventory)
Credit: increase in liabilities (AP)
Sales of $2200. Cash sales of $1200 and sold $1000 on customer credit. (Compound entry: Some transactions will affect more than one account)
Debit: increase in assets (cash)
Debit: increase in assets (AR)
Credit: increase in Revenue
Thingamajig Material Expense
Thingamajig Material - Inventory
$600 in Thingamajig material was used to make more Thingamajigs.
Debit: increase in expenses (Thingamajig Material)
Credit: decrease in asset (inventory)
Paid $1800 on credit account.
Debit: decrease in liabilities (AP)
Credit: decrease in assets (cash)
Collected $500 in cash from credit customers.
Debit: increase in assets (cash)
Credit: decrease in asset (AR)
Notice how each transaction is balanced. Everything entered on the left hand (debit) side equals the (credit side) right hand side. That’s what double entry bookkeeping is all about—transactions must balance. It’s kind of like what you learned in basic algebra classes–if you can remember back that far – what you did to one side of the equation you had to do to the other side.
Couple more tips:
- The above accounting journal entries did not include account numbers. Usually in real life, you would use the account numbers from your chart of accounts to identify each account.
- You do not use dollar signs in recording the amounts. If the journal is prepared in the United States the amounts are understood to be in the US Dollar.