Accounting Journal Entries

Review and Practice Materials

What is a journal entry in Accounting?

Journal entry is an entry to the journal.

Journal is a record that keeps accounting transactions in chronological order, i.e. as they
occur.
Ledger is a record that keeps accounting transactions by accounts.
Account is a unit to record and summarize accounting transactions.

All accounting transactions are recorded through journal entries that show account names,
amounts, and whether those accounts are recorded in debit or credit side of accounts.

Double-Entry Recording of Accounting Transactions

To record transactions, accounting system uses double-entry accounting.

Double-entry implies that transactions are always recorded using two sides, debit and credit.

Debit refers to the left-hand side and credit refers to the right-hand side of the journal entry or
account.

The sum of debit side amounts should equal to the sum of credit side amounts.
A journal entry is called "balanced" when the sum of debit side amounts equals to the sum of
credit side amounts.

T-Account
This form looks like a letter "T", so it is called a T-account.
T-account is a convenient form to analyze accounts, because it shows both debit and credit
sides of the account.

Account

Debit Credit
Examples of Journal Entries

Transaction 1: Company A sold its products at $120 and received the full amount in cash.

Self-Questions Answers
Steps

1 What did Company A receive? Cash.

2 If Company A received cash, how would this affect the Receiving cash increases the
cash balance? cash balance of the company.

3 Which side of cash account represents the increase in Debit side (Left side).
cash?

4 What is the account name to record the sales of Sales.

products.

5 Which side of sales account represents the increase in Credit side (Right side).
sales?

6 Does the sum of debit side amounts equal to the sum of Yes.
credit side amounts? In other words, does this journal $120 = $120
entry balance?
[Journal entry to record transaction 1]

Debit Credit

Cash 120

Sales 120

Examples of Journal Entries

Transaction 2: Company A purchased supplies and paid $50 in cash.

Self-Questions Answers
Steps

1 What did Company A receive? Supplies.

 2 If Company A received supplies, how would this affect the It increases
supplies balance? supplies balance.

3 Which side of supplies account represents the increase in cash? Debit side (Left
side).

4 What did Company A pay? Cash.

5 Which side of cash account represents the decrease in cash? Credit side (Right
side).

6 Does the sum of debit side amounts equal to the sum of credit Yes.
side amounts? In other words, does this journal entry balance?
$50 = $50
[Journal entry to record transaction 2]

Debit Credit

Supplies 50

Cash 50

Debits and Credits of Accounts

Debit Credit

Increase in asset accounts Decrease in asset accounts

Increase in expense accounts Decrease in expense accounts

Decrease in liability accounts Increase in liability accounts

Decrease in equity accounts Increase in equity accounts

Decrease in revenue accounts Increase in revenue accounts

Normal Balances of Accounts

Accounts have normal balances on the side where the increases in such accounts are recorded.
 Asset accounts have normal balances on debit side.
Expense accounts have normal balances on debit side.

Liability accounts have normal balances on credit side.

Equity accounts have normal balances on credit side.
Revenue accounts have normal balances on credit side.

In the financial statements, accounts are reported on the sides where they have normal
balances.

Balance Sheet

Asset Liabilities
s

Owners' Equity

Income Statement

Expense Revenues
s
 Ledger
T account

A T account is a graphic representation of a general ledger account. The name of the

account is placed above the "T" (sometimes along with the account number). Debit entries
are depicted to the left of the "T" and credits are shown to the right of the "T". The grand
total balance for each "T" account appears at the bottom of the account. A number of T
accounts are typically clustered together to show all of the accounts affected by an
accounting transaction. The T account is a fundamental training tool in double entry
accounting, showing how one side of an accounting transaction is reflected in another
account. It is also quite useful for clarifying the more complex transactions. This approach
is not used in single entry accounting, where only one account is impacted by each
transaction.

T Account Example

In the following example of how T accounts are used, a company receives a $10,000 invoice
from its landlord for the July rent. The T account shows that there will be a debit of $10,000
to the rent expense account, as well as a corresponding $10,000 credit to the accounts
payable account. This initial transaction shows that the company has incurred an expense as
well as a liability to pay that expense.

The bottom set of T accounts in the example show that, a few days later, the company pays
the rent invoice. This results in the elimination of the accounts payable liability with a debit
to that account, as well as a credit to the cash (asset) account, which decreases the balance
in that account.
 The T account has two primary uses, which are:

 To teach accounting, since it presents a clear representation of the flow of transactions

through the accounts in which transactions are stored.

 To clarify more difficult accounting transactions, for the same reason.

The T account concept is especially useful when compiling more difficult accounting
transactions, where the accountant needs to see how a business transaction impacts all parts
of the financial statements. By using a T account, one can keep from making erroneous
entries in the accounting system.

For day-to-day accounting transactions, T accounts are not used. Instead, the accountant
creates journal entries in accounting software. Thus, T accounts are only a teaching and
account visualization aid.
 Trial Balance
What is a Trial Balance?

Trial Balance is a list of closing balances of ledger accounts on a certain date and is the first step
towards the preparation of financial statements. It is usually prepared at the end of an accounting
period to assist in the drafting of financial statements. Ledger balances are segregated into debit
balances and credit balances. Asset and expense accounts appear on the debit side of the trial
balance whereas liabilities, capital and income accounts appear on the credit side. If all
accounting entries are recorded correctly and all the ledger balances are accurately extracted, the
total of all debit balances appearing in the trial balance must equal to the sum of all credit
balances.

Purpose of a Trial Balance

 Trial Balance acts as the first step in the preparation of financial statements. It is a
working paper that accountants use as a basis while preparing financial statements.

 Trial balance ensures that for every debit entry recorded, a corresponding credit entry has
been recorded in the books in accordance with the double entry concept of accounting. If
the totals of the trial balance do not agree, the differences may be investigated and
resolved before financial statements are prepared. Rectifying basic accounting errors can
be a much lengthy task after the financial statements have been prepared because of the
changes that would be required to correct the financial statements.

 Trial balance ensures that the account balances are accurately extracted from accounting
ledgers.

 Trail balance assists in the identification and rectification of errors.

 Example

Following is an example of what a simple Trial Balance looks like:

ABC LTD
Trial Balance as at 31 December 2011

Debit Credit
Account Title
$ $

Share Capital 15,000

Furniture & Fixture 5,000

Building 10,000

Creditor 5,000

Debtors 3,000

Cash 2,000

Sales 10,000

Cost of sales 8,000

General and Administration Expense 2,000

Total 30,000 30,000

 Title provided at the top shows the name of the entity and accounting period end for
which the trial balance has been prepared.
  Account Title shows the name of the accounting ledgers from which the balances have
been extracted.

 Balances relating to assets and expenses are presented in the left column (debit side)
whereas those relating to liabilities, income and equity are shown on the right column
(credit side).

 The sum of all debit and credit balances are shown at the bottom of their respective
columns.

Limitations of a trial balance

Trial Balance only confirms that the total of all debit balances match the total of all credit
balances. Trial balance totals may agree in spite of errors. An example would be an incorrect
debit entry being offset by an equal credit entry. Likewise, a trial balance gives no proof that
certain transactions have not been recorded at all because in such case, both debit and credit
sides of a transaction would be omitted causing the trial balance totals to still agree. Types of
accounting errors and their effect on trial balance are more fully discussed in the section on
Suspense Accounts.