How to Do Journal Entries for a Small Business

The accounting process of a small business starts with making journal entries, this is the first step of the many proceeding steps. Hence it is very important to act with caution while making journal entries because an error at this point goes deep into the financial system and can be hard to identify and eliminate at later stages e.g. at the time of monthly or yearly closing of accounts for preparation of financial statements.

Recording financial transactions is an absolute must for any business. It brings many benefits e.g. it keeps track of all the financial activity of an organization, it show the profit or loss and other important financial information summarized in concise financial statements, it acts as a control mechanism to avoid errors and fraud etc. Renowned investor Warren Buffet is often quoted on the importance of financial accounting in any business with his following statement ‘Accounting is the language of business, and you have to learn it like a language… To be successful at business’.

A journal is book or worksheet where the all the entries of a business are made in a chronological order, journal entries are made to record changes in all the ledger accounts of a business. Booking all the entries in one journal results in a massive log of entries, to simplify, businesses usually keep separate journal books for sales, purchases, general entries and cash/bank journal. So for example all the sales will be booked in the sales journal, purchases in the purchase general, adjusting and other entries in the general journal and cash/bank entries in the cash/bank journal which is also known as cash book. It should be noted that keeping a general journal for all entries is perfectly acceptable.

From our previous learning, we know that a journal entry has at least one debit and one credit account entry with the value of both being the same. We also know when to debit an account and when to credit it by determining the increase or decrease in its value. Putting this knowledge to practice, we can make journal entries for a small business.

The example below identifies a number of transactions which occur in a business in a given timeframe, the journal entries for the listed transactions are provided after the example to understand how to record journal entries.

Example of Journal Entries for a Small Business:

Financial Transactions of XYZ Ltd in the month of March, 2017.

1) XYZ, a paper trading company, started business on 01st March 2017 with $50,000.00 cash, $10,000.00 worth of paper and furniture costing $15,000.00

2) On 3rd March, XYZ sold paper to ABC Ltd for $350.00 cash.

3) Expenses for the month amounted to $1,000.00 for rent, $300.00 for fuel and $200.00 for stationary. Fuel and stationary expenses were paid with rent being outstanding at month end.

4) On 10th March, cash amount of $35,000.00 was deposited into newly opened business bank account.

5) On 31th march, Salaries of 2 employees amounting to $5,000.00 were paid in half through bank checks.

Prepare journal entries for the information provided above:

Solution:

1)

Date Description Debit $ Credit $
01st March, 2017 Cash 50,000.00
01st March, 2017 Inventory (Paper) 10,000.00
01st March, 2017 Furniture 15,000.00
01st March, 2017 Capital 75,000.00

 

2)

Date Description Debit $ Credit $
03rd  March, 2017 Cash 350.00
03rd  March, 2017 Inventory (Paper) 350.00

 

3)

Date Description Debit $ Credit $
31st March, 2017 Rent Expense 1,000.00
31st March, 2017 Payable (Landlord) 1,000.00
31st March, 2017 Fuel Expense 300.00
31st March, 2017 Cash 300.00
31st March, 2017 Stationary Expense 200.00
31st March, 2017 Cash 200.00

 

4)

Date Description Debit $ Credit $
10th March, 2017 Bank 35,000.00
10th March, 2017 Cash 35,000.00

 

5)

Date Description Debit $ Credit $
31st March, 2017 Salaries Expense $5,000.00
31st March, 2017 Bank $2,500.00
31st March, 2017 Salaries Payable $2,500.00

 

This is a basic example of how to do journal entries for a small business.  It can be a struggle for some to pick this concept up but just keep practicing and it will become natural in no time!

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