Examples of Accounting Journal Entries

Recording financial transactions through journal entries is the first step of an accounting system. Journal entries use two or more accounts and generally have the following features:

  • Journal entry is an integral part of the double entry accounting system.
  • There is at least one debit and one credit entry in a journal entry.
  • A journal entry can record any number of debits and credits provided the total of both tallies.
  • Journal entries can be used to record movement in all company accounts i.e. assets, liabilities, income, expense and capital.
  • Journal entries are made in a chronological order.
  • The entries made in journals are then posted to individual ledger accounts which are then used to prepare the trial balance and financial statements of a business entity.
  • The recording of debit or credit in a journal entry depends on the change in the value the account category being booked. E.g. increase in asset and expense is debit while an increase in liability, income and equity is a credit.

Having a detailed understanding of how the journal entry works, we can now move on to practical examples to view the practical application of journal entries illustrated by the following comprehensive example:

George intends to develop an mobile app which creates and tracks personal budgets. He has registered a startup business by the name of G. Tech to fulfill his aim. The entity was registered on 1st Jan, 2017 and at the end of the month, the following transactions were identified, George wants journal entries for to be passed for these transactions and have contacted you for help. Review the transactions and pass journal entries accordingly.

Events:

1st Jan                  George deposited $50,000.00 from his personal savings and borrowings into the business bank account.

1st Jan                  Company registration charges of $750.00 were paid to registration consultant from business bank account.

3rd Jan                 Purchase of computer equipment worth $500.00.

3rd Jan                 Office premises is acquired for a monthly rent of $900.00 payable at the start of each month. Rest Estate agent’s commission of $1,000.00 is paid at the spot.

4th Jan                 George withdrew $230.00 from business bank account for groceries. On the same day another expense of $100.00 for fuel was paid by George from his own pocket, George believes this fuel expense should be charged to business since most of the travelling would be for business development.

8th Jan                 George hires a developer and a business analyst on monthly salaries of $5,000.00 and $2,800.00 respectively.

15th Jan               The newly hired developer collaborates with a freelance IT service provider to get a module of the app configured, the freelancer worked for 4 hours at $40.00 per hour. The payment would only be made after a test run and approval from George.

20th Jan               George made a payment of $1,250.00 being the monthly installment for his auto loan from his business account.

28th Jan               As the application goes into testing phase, George wants to let a word out about his product and spends $300.00 on marketing from the business account.

31st Jan                Salaries for the month of Jan and Rent for Feb is paid.

 

Solution:

Date Description  Debit (USD)  Credit (USD)
1st Jan Bank          50,000.00
1st Jan Capital                 50,000.00
Narration: Increase in asset and equity accounts.
1st Jan Company Registration Expense                750.00
1st Jan Bank                       750.00
Narration: Increase in Expense and Decrease in asset Account.
3rd Jan Computer Euipment asset                500.00
3rd Jan Bank                       500.00
Narration: Increase in one asset account and decrease in another.
3rd Jan Prepaid Rent                841.93
3rd Jan Bank                       841.93
Narration: Rent for 29 days starting from 3rd Jan to 31st Jan (900 x 29/31 = 841.95) resulting in creation of an asset i.e. prepayment and decrease in asset bank account.
3rd Jan Estate Agent Commission             1,000.00
3rd Jan Bank                   1,000.00
Narration: Increase in expense and decrease in asset account.
4th Jan Capital                230.00
4th Jan Bank                       230.00
Narration: Decrease in both the capital and asset accounts.
4th Jan Fuel Expense                100.00
4th Jan Payable to George                       100.00
Narration: Increase in both expense and liability accounts.
15th Jan Professional services expense                160.00
15th Jan Payable to Freelancer                       160.00
Narration: Increase in both expense and liability accounts.
20th Jan Capital             1,250.00
20th Jan Bank                   1,250.00
Narration: Decrease in both equity and asset accounts.
28th Jan Marketing Expense                300.00
28th Jan Bank                       300.00
Narration: Increase in expense and decrease in asset account.
31st Jan Salaries Expense             6,038.71
31st Jan Bank                   6,038.71
Narration: Salaries for 24 days = 7800 x 24/31 = 6038.71 as an increase in the expense and decrease in asset account.
31st Jan Prepaid Rent for Feb                900.00
31st Jan Bank                       900.00
Narration: Increase in two asset accounts i.e. prepayment and bank.
31st Jan Rent expense for the first month                841.93
31st Jan Prepaid rent paid on 3rd Jan                       841.93
Narration: This entry records the rent expense when it is due i.e.at the end of the month, at the time of payment on 3rd Jan, the prepayment was created as an asset. This is an example of adjusting journal entry usually made at the time of period end or closing of accounts.

 

These are just a few examples of accounting journal entries for a small business.  We have more examples of journal entries on our site to help with understanding the concept.

 

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