The double-entry bookkeeping process of a small business starts with making journal entries, this is the first step of the many proceeding steps of the accounting system. 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 business 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 shows the profit or loss and other important financial information summarized in concise financial statements (income statement, cash flow statement, balance sheet), 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 general ledger is a book or worksheet where all the entries of a business are made in chronological order with a description of the transaction, a general journal entry is made to record changes in all general 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 ledger accounts for sales, purchases, general entries, and cash/bank journal entries. So, for example, all the sales will be booked in the sales journal, purchases in the purchase ledger, adjusting and other journal entries in the general journal, and cash/bank entries in the cash/bank journal entries which are also known as the cash account 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 side (dr) and one credit side (cr) account entry with the value of both being the same. This is known as the double-entry accounting system. 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 several transactions that 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 with the name of the account, account type, and account balances.
Example Of Journal Entries For A Small Business:
Financial Transactions of XYZ Ltd in the accounting period 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, received an invoice for paper sold to ABC Ltd for $350.00 as accounts receivable.
3) Expenses for the month amounted to $1,000.00 for rent, $300.00 for fuel, and $200.00 for stationery. Fuel and stationery expenses were paid with rent being outstanding at month-end.
4) On 10th March, a cash amount of $35,000.00 was deposited into a 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 | Accounts Receivable | 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 accounting 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! If you are having trouble, be sure to remember to use the t-account format to visualize the summary of a debit entry and credit entry, as well as the debit column balance and credit column balance.