A Guide for Journal Entries in Accounting with Examples

Journal Entries

The first step of the accounting cycle is identifying the financial transactions of a business. Once the financial transactions are identified, they are recorded in the accounting books by making journal entries. Therefore, journal entries can be defined as a process of recording financial transactions in the accounting books.

The process of journal entry follows a double-entry bookkeeping system. As per the double-entry bookkeeping system, every financial transaction is recorded in at least two accounts and the sum of debit entries will always be equal to the sum of credit entries.

To understand the process of journal entries, first, we divide all the accounts used in the accounting process into the following five categories:

1. Assets account: All the assets are increased with debit and decreased with credit.
2. Liabilities account: All the liabilities are increased with credit and decreased with debit
3. Stockholders’ equity account: all the stockholders’ equity accounts are increased with credit and decreased with debit
4. Expenses and losses account: All the expenses are increased with debit and decreased with credit.
5. Revenue and income account: All the income and revenue are increased with credit and decreased with debit.

We can also represent this relationship between accounts and changes as follows:

 

Account types	Increase	Decrease
Assets	Debit	Credit
Liabilities	Credit	Debit
Stockholders’ equity	Credit	Debit
Expenses and losses	Debit	Credit
Income and revenue	Credit	Debit

 

Now, let us understand the recording of the transactions using journal entries with the following example:

1. On January 1, 2024 Mr. A starts a business with $15,000 in cash in exchange for the common stock of the company.

This transaction affects two accounts; one is cash and the other is common stock. We can see that cash is increasing by $10,000 and on the other hand common stock is also increasing by the same amount.

Therefore, the journal entry for this transaction will be as follows:

Date	Description	Ref.	Debit	Credit
1-Jan-24	Cash		$    15,000
	Common stock			15,000
	(To record the capital contributed by Mr. A)

 

2. On January 5, 2025, Mr. A purchased and equipment for $10,000.

In this transaction, one asset (cash) is being decreased and other account (equipment) is being increased. Therefore, the journal entry for this will be as follows:

Date	Description	Ref.	Debit	Credit
5-Jan-24	Equipment		$    10,000
	Cash			10,000
	(To record the equipment purchased in cash)

 

3. On January 8, 2024, Mr. A purchased merchandise inventory of $3,000 on account.

In this transaction, one asset (Inventory) is being increased and one liability (Account payable) is being increased. Therefore, the journal entry for this will be as follows:

Date	Description	Ref.	Debit	Credit
8-Jan-24	Merchandise inventory		$    3,000
	Accounts payable			3,000
	(To record the inventory purchased on account)

 

4. On January 10, 2024, Mr. A sold the merchandise (costing $3,000) to M Ltd for $5,000 on account.

In this transaction, the affected accounts are merchandise sales accounts, accounts receivable (M Ltd), cost of goods sold, and Merchandise inventory. Therefore, this transaction will require two entries; one is for sales and the other is for cost of goods sold.

In the first entry, the accounts receivable (asset) is increasing and sales revenue is also increasing. Therefore, when an asset is increased it is debited and when revenue is increased it is credited.

 

Date	Description	Ref.	Debit	Credit
10-Jan-24	Accounts receivable		$    5,000
	Sales revenue			5,000
	(To record the sales made on accounts)

 

The second entry for this transaction will involve the cost of goods sold account and inventory account. The cost of goods sold is an expense and hence, it will be debited by $3,000. Inventory is an asset and it is decreasing therefore, it will be credited by the same amount.

 

Date	Description	Ref.	Debit	Credit
10-Jan-24	Cost of goods sold		$    3,000
	Merchandise inventory			3,000
	(To record the sales made on accounts)

 

5. On January 15, 2024, Mr. A received $4,000 from M Ltd.

This transaction will increase cash by $4,000 and decrease accounts receivable by same amount.

Date	Description	Ref.	Debit	Credit
15-Jan-24	Cash		$    4,000
	Accounts receivable			4,000
	(To record the sales made on accounts)

 

6. On January 20, Mr. paid all the owed amount for merchandise inventory.

Here, the account payable will be decreased along with cash by $3,000.

Date	Description	Ref.	Debit	Credit
15-Jan-24	Accounts payable		$    3,000
	Cash			3,000
	(To record the sales made on accounts)