How to make Journal Entries in Accounting [Examples]
What is Journal Entry?
A Journal Entry is simply a summary of the debits and credits of the transaction entry to the Journal. Journal entries are important because they allow us to sort our transactions into manageable data.
Consider the following diagram
You’ll notice the above diagram shows the first step as “Source Documents”. Source documents are things such as receipts, invoices, bank statements and credit card statements that are collected during the year so that we have all the information we need when the time comes for us do our accounting/bookkeeping. Obviously, in this tutorial, we won’t be asking you to go out and collect invoices and receipts, so we’ll conveniently “skip” that step for now.
The next step is entering journals. Every time a transaction occurs, it’s recorded using a journal entry.
Example
Everything we do from this point on will be stuff that real accountants and bookkeepers are doing in their offices at this very moment. That means this lesson will be a little more technical than the previous ones. Don’t let that spook you though. You’ll be surprised at how simple it can be! Now would be a good time for us to lay out the steps in the accounting/bookkeeping process:
Imagine having a large stack of receipts and invoices from different shops, suppliers, and customers. All the information you need is there, but it’s useless when it’s all messed up like that! Journal entries help us sort all this into meaningful information.
Here’s what a typical journal entry looks like:
Transaction: Pay an expense of $100.
Journal entry:
| Dr | Expense | $100 |
| Cr | Bank | $100 |
Let’s take a look at what this means.
First of all, Dr and Cr are simply abbreviations for Debit and Credit.
Every single transaction consists of two movements: a debit movement and a credit movement. Be careful not to confuse this with the debit and credit sides. These are two different things.
Debit and credit movements are used in accounting to show increases or decreases in our accounts. Therefore instead of saying there has been an increase or a decrease in an account, we say there has been a debit movement or a credit movement.
For example, in the previous tutorial we learned to show the above transaction like this:
| DEBIT SIDE | CREDIT SIDE | ||
| Account | Amount | Account | Amount |
| Expense | +$100 | ||
| Bank | -$100 | ||
Now, instead of showing these as pluses and minuses, we will show them in a journal entry as debit movements and credit movements:
| Dr | Expenses | $100 |
| Cr | Bank | $100 |
The nature of each movement is explained below:
| DEBIT SIDE (Assets, Expenses, Drawings) | CREDIT SIDE (Liabilities, Revenue, Owner’s Equity) | |
| Increase | Debit movement | Credit movement |
| Decrease | Credit movement | Debit movement |
Let’s apply this to our example:
When we pay expenses that means our expenses have increased. Also, when we pay expenses, our bank account is obviously going to go down.
So, in summary, we need to record a transaction that will increase expenses and decrease bank.
Referring back to our matrix, we can see that to increase expenses we require a debit movement.
| DEBIT SIDE (Assets, Expenses, Drawings) | CREDIT SIDE (Liabilities, Revenue, Owner’s Equity) | |
| Increase | Debit movement | Credit movement |
| Decrease | Credit movement | Debit movement |
We can also see that decreasing our bank requires a credit movement:
| DEBIT SIDE (Assets, Expenses, Drawings) | CREDIT SIDE (Liabilities, Revenue, Owner’s Equity) | |
| Increase | Debit movement | Credit movement |
| Decrease | Credit movement | Debit movement |
Hence our journal entry will involve a debit movement to expenses, a credit movement to a bank, just as we saw before:
Dr
|
Expenses
|
$100
|
Cr
|
Bank
|
$100
|
Now it’s your turn. Have a go at writing journal entries for the transactions we’ve had in the previous lessons. The first one has been done for you.
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