Accounting Journal Entries1

6/24/2009 Accounting Journal Entries
Accounting Study Guide
U.S. GA A P IFRS, IA S Accounting Topics
Journal Entries in Accounting
Examples of Journal Entries

A djusting Journal Entries
What is a journal entry in A ccounting?
Journal e ntry is a n e ntry to the journal.

Journal is a re cord tha t k e e ps accounting tra nsa ctions in chronological orde r, i.e . a s the y occur.
Le dge r is a re cord tha t k e e ps accounting tra nsa ctions by a ccounts.
Account is a unit to re cord and sum m arize a ccounting transactions.
All a ccounting transactions a re re corde d through journal e ntrie s tha t show a ccount nam e s, a m ounts, and whe the r
those accounts are re corde d in de bit or cre dit side of a ccounts.
Double-Entry A ccounting
To re cord transactions, a ccounting syste m use s double -e ntry a ccounting.

Double -e ntry im plie s tha t transactions a re a lways re corde d using two side s, de bit and cre dit.
De bit re fe rs to the le ft-hand side and cre dit re fe rs to the right-ha nd side of the journal e ntry or a ccount.
The sum of de bit side a m ounts should e qual to the sum of cre dit side a m ounts.
A journa l e ntry is ca lle d "balance d" whe n the sum of de bit side am ounts e quals to the sum of cre dit side a m ounts.
T-A ccount
This form look s lik e a le tte r "T", so it is calle d a T-account. T-account is a conve nie nt form to a na lyze accounts,
be cause it shows both de bit and cre dit side s of the a ccount.
A ccount
Debit Credit
accountinginfo.com/study/je/je-01.htm 1/4
Tra nsa ction 1: C om pa ny A sold its products a t $120 and re ce ive d the full am ount in cash.
Ste ps Se lf-Q ue stions Answe rs
1 W ha t did C om pany A re ce ive ? C a sh.
2 If C om pa ny A re ce ive d ca sh, how would this a ffe ct the ca sh balance ? R e ce iving ca sh incre a se s the
cash ba la nce of the com pany.
3 W hich side of ca sh a ccount re pre se nts the incre ase in ca sh? De bit side (Le ft side ).
4 W ha t is the a ccount nam e to re cord the sale s of products. Sale s.
5 W hich side of sale s a ccount re pre se nts the incre ase in sale s? C re dit side (R ight side ).
6 Doe s the sum of de bit side a m ounts e qua l to the sum of cre dit side Ye s.
a m ounts? In othe r words, doe s this journa l e ntry balance ? $120 = $120
[Journal entry to record transaction 1]
De bit C re dit
C ash 120
Sa le s 120
Tra nsa ction 2: C om pa ny A purchase d supplie s a nd pa id $50 in cash.
Ste ps Se lf-Q ue stions Answe rs
1 W ha t did C om pany A re ce ive ? Supplie s.
2 If C om pa ny A re ce ive d supplie s, how would this affe ct the supplie s It incre ase s supplie s ba la nce .
balance ?
3 W hich side of supplie s account re pre se nts the incre a se in cash? De bit side (Le ft side ).
4 W ha t did C om pany A pay? C a sh.
5 W hich side of ca sh a ccount re pre se nts the de cre ase in ca sh? C re dit side (R ight side ).
6 Doe s the sum of de bit side a m ounts equa l to the sum of cre dit side Ye s.
a m ounts? In othe r words, doe s this journa l e ntry balance ?
$50 = $50
[Journal e ntry to re cord tra nsa ction 2]
De bit C re dit
Supplie s 50
C ash 50
Debits and Credits of A ccounts
De bit C re dit
Incre a se in a sse t a ccounts De cre ase in asse t accounts
Incre ase in e x pe nse accounts De cre a se in e x pe nse a ccounts
De cre ase in liability a ccounts Incre ase in liability a ccounts
De cre a se in e quity a ccounts Incre a se in e quity a ccounts
De cre a se in re ve nue accounts Incre a se in re ve nue accounts
Normal Balances of A ccounts
Accounts ha ve norm al ba la nce s on the side whe re the incre ase s in such a ccounts a re re corde d.
Asse t accounts ha ve norm al ba la nce s on de bit side .
Ex pe nse a ccounts have norm a l balance s on de bit side .
Lia bility accounts ha ve norm al ba la nce s on cre dit side .
Equity a ccounts have norm a l balance s on cre dit side .
R e ve nue a ccounts have norm a l balance s on cre dit side .
O n the financial state m e nts, a ccounts a re re porte d on the side s whe re the y have norm a l balance s.
Lia bility accounts ha ve norm al ba la nce s on cre dit side .
Equity a ccounts have norm a l balance s on cre dit side .
Balance She e t
Asse ts Liabilitie s
O wne rs' Equity
Incom e State m e nt
Ex pe nse s R e ve nue s
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6/24/2009 Adjusting Journal Entries
Adjusting Journal Entries
Basics of Journal Entries
What is an adjusting journal entry?

Adjusting journa l e ntry is a journa l e ntry prepare d to adjust account ba la nces.
The only wa y of cha nging a ccount balance s is to m a k e journal e ntrie s.
Account ba la nce s cannot be change d without journal e ntrie s.
If curre nt a ccount balance s do not re pre se nt corre ct a m ounts, journal e ntrie s are ne e de d to cha nge curre nt balance s
to the corre ct ba la nce s.
--> Journa l e ntrie s pre pare d with this purpose a re adjusting journal entries.
Why do companies need adjusting journal entries?

C urre nt a ccount balance s m a y not re pre se nt corre ct balance s due to following re a sons:
a . C om pa ny m ade m ista k e s in pre pa ring journa l e ntrie s in the past.
b. Accounting re cords a re not update d to re fle ct ne w tra nsa ctions or a m ount change s in pre vious tra nsa ctions.
Adjusting journa l e ntrie s a re usua lly pre pa re d at the e nd of a n a ccounting pe riod to upda te a ccount balance s to
re fle ct corre ct balance s as of the ba la nce she e t da te (the da te a t the e nd of an accounting pe riod).
The tim ing diffe re nce s in re cognizing re ve nue s a nd e x pe nse s be twe e n accrual ba sis a nd ca sh basis accounting a re
fre que ntly corre cte d by adjusting journa l e ntrie s.
Three steps of preparing adjusting journal entries

Ste p 1: Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod.
Ste p 2: Ide ntify the corre ct account ba la nce s.
Ste p 3: Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l e ntrie s to adjust such
diffe re nce s.
Example 1
C om pa ny A sold its products a t the price of $1,000 for cash. Howe ve r, this transaction was re corde d a s $100 sale s.
W ha t is the a djusting journal e ntry to corre ct this m ista k e ?
Ste p 1 Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod.
De bit C re dit
C a sh 100
Sale s 100
Ste p 2 Ide ntify the corre ct account ba la nce s.
C ash 1,000 (De bit Balance )
Sa le s 1,000 (C re dit Balance )
Ste p 3 Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l
e ntrie s to adjust such diffe re nce s.
Accounts C orre ct C urre nt C orre ct - C urre nt
C a sh 1,000 100 900
Sa le s 1,000 100 900
accountinginfo.com/study/…/index.htm 1/3
6/24/2009 Adjusting Journal Entries
To a djust the se diffe re nce s, following a djusting journal e ntry is ne e de d.
De bit C re dit
C a sh 900
Sale s 900
Example 2
O n De ce m be r 1, 2006 C om pany A signe d an insura nce contract and paid $3,000 ca sh a s insura nce pre m ium for
thre e m onths. C om pa ny re corde d $3,000 as pre paid insurance on De ce m be r 1, 2006. P re pare adjusting journa l e ntrie s
a t De ce m be r 31, 2006.
Ste p 1 Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod.
De bit C re dit
Pre pa id insura nce 3,000
C a sh 3,000
Ste p 2 Ide ntify the corre ct account ba la nce s.
O n De ce m ber 31, 2006, $1,000 insura nce prem ium should be re cognized as an e x pe nse for De ce m be r.
Insura nce e x pe nse 1,000 (De bit Ba la nce )
Pre pa id insura nce 2,000 (De bit Ba la nce )

Insurance e x pe nse for 1999 = $3,000 x 1/3 = $1,000
Ste p 3 Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l
e ntrie s to adjust such diffe re nce s.
Accounts C orre ct C urre nt C orre ct - C urre nt
Insura nce e x pe nse 1,000 0 1,000
Pre pa id insura nce 2,000 3,000 (1,000)
To a djust the se diffe re nce s, following a djusting journal e ntry is ne e de d.

De bit C re dit
Insurance e x pe nse 1,000
P re paid insurance 1,000
C re dit side of pre pa id insura nce (an asse t account) re pre se nts a de cre a se .
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Basics of Journal Entries
Example 1: Financing A ctivities
Owner invested $10,000 in the company.
A nalysis of Transaction
Ste ps De bit or C re dit ?
1 Incre a se in Asse ts (C ash) by $10,000 De bit
2 Incre a se in O wne r's Equity by $10,000 C re dit
Journal Entry
De bit C re dit
C a sh 10,000
O wne r's Equity 10,000
Description of Journal Entry

O wne r inve ste d $10,000 in the com pany.
Results of Journal Entry

C a sh balance incre ase s by $10,000. --> Incre a se in Asse ts
O wne r's Equity balance incre ase s by $10,000. --> Incre a se in O wne r's Equity
Example 2: Financing A ctivities
The company borrowed $20,000 from a bank.
2 Incre a se in Liabilitie s (Borrowings) by $20,000 C re dit
Journal Entry
De bit C re dit
C a sh 20,000
Borrowings 20,000

Borrowe d $20,000.

C a sh balance incre ase s by $20,000. --> Incre a se in Asse ts
Borrowings ba la nce incre a se s by $10,000. --> Incre ase in Lia bilitie s
Example 3: Investing A ctivities
The company purchased $12,000 equipment and paid in cash.
1 Incre a se in Asse ts (Equipm e nt) by $12,000 De bit
2 De cre ase in Asse ts (C a sh) by $12,000 C re dit
Journal Entry
De bit C re dit
Equipment 12,000
C a sh 12,000
P urcha se d $12,000 e quipm e nt in ca sh.

Equipm e nt ba la nce incre a se s by $12,000. --> Incre ase in Asse ts
C a sh balance de cre ase s by $12,000. --> De cre ase in Asse ts
Example 4: Operating A ctivities
The company purchased $6,000 merchandise (600 units) on credit.
1 Incre a se in Asse ts (Me rchandise ) by $6,000 De bit
2 Incre a se in Liabilitie s (Accounts Pa yable ) by $6,000 C re dit
Journal Entry
De bit C re dit
Merchandise 6,000
Accounts P aya ble 6,000

P urcha se d $6,000 m e rcha ndise on cre dit.

Me rcha ndise ba la nce incre a se s by $6,000. --> Incre a se in Asse ts
Accounts P aya ble balance incre ase s by $6,000. --> Incre ase in Lia bilitie s
The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of
sale.
Note: This transaction includes both "REVENUE" and "EXPENSE" components.
(1) REVENUE side

2 Incre a se in Asse ts (Accounts R e ce ivable ) by $2,000 De bit
3 Incre a se in R e ve nue (Sa le s) by $11,000 C re dit
(2) EXPENSE side

1 Incre a se in Ex pe nse s (C ost of Me rcha ndise Sold) by $5,000 De bit
($6,000 / 600 units = $10 pe r unit)
($10 pe r unit X 500 units sold = $5,000 cost)
2 De cre ase in Asse ts (Me rcha ndise ) by $5,000 De bit
(1) REVENUE Journal Entry

De bit C re dit
C a sh 9,000
Accounts R e ce iva ble 9,000
Sale s R e ve nue 11,000
Sold m e rcha ndise at $11,000 price a nd re ce ive d $9,000 in cash.

C a sh balance incre ase s by $9,000. --> Incre ase in Asse ts
Accounts R e ce iva ble balance incre ase s by $2,000. --> Incre ase in Asse ts
Sale s R e ve nue account ba la nce incre a se s by $11,000. --> Incre ase in R e ve nue
(2) EXPENSE Journal Entry

De bit C re dit
C ost of Me rcha ndise Sold 5,000
Me rcha ndise 5,000

To re cord the cost of m e rchandise sold.

Me rcha ndise ba la nce de cre a se s by $5,000. --> De cre ase in Asse ts
C ost of Me rcha ndise Sold account ba la nce incre a se s by $5,000. --> Incre a se in Ex pe nse
The company paid $3,500 salaries.
1 Incre a se in Ex pe nse s (Salarie s Ex pe nse ) by $3,500 De bit
Journal Entry
De bit C re dit
Salarie s Ex pe nse 3,500
C a sh 3,500

P aid $3,500 salarie s.

C a sh balance de cre ase s by $3,500. --> De cre a se in Asse ts
Salaries Ex pe nse account ba la nce increase s by $3,500. --> Increase in Ex pe nse s
The company paid $1,500 rent.
1 Incre a se in Ex pe nse s (R e nt Ex pe nse ) by $1,500 De bit
Journal Entry
De bit C re dit
R e nt Ex pe nse 1,500
C a sh 1,500

P aid $1,500 re nt.

C a sh balance de cre ase s by $1,500. --> De cre a se in Asse ts
R e nt Ex pe nse account ba la nce incre a se s by $1,500. --> Incre a se in Ex pe nse s
Further analysis of these transactions continues on the next file.
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6/24/2009 Accrual Basis Accounting
Accrual Basis vs. Cash Basis Accounting
U.S. GAAP by Topic

Financial Sta te m e nts
Accounting for Inve ntorie s
De pre cia tion Me thods
Accounting Journa l Entrie s
A ccrual Basis A ccounting
Unde r the a ccrua l basis accounting, re ve nue s and e x pe nse s a re re cognize d a s follows:
R e ve nue re cognition: R e ve nue is re cognize d whe n both of the following conditions a re m e t:

a . R e ve nue is e a rne d.
b. R e ve nue is re a lize d or re aliza ble .
R e ve nue is e a rne d whe n products are de live re d or se rvice s are provide d.

R e alize d m e a ns cash is re ce ive d.
R e aliza ble m e a ns it is re asona ble to e x pe ct that cash will be re ce ive d in the future .
Ex pe nse re cognition: Ex pe nse is re cognize d in the pe riod in which re la te d re ve nue is re cognize d (Matching Principle).
Cash Basis A ccounting
Unde r the ca sh basis accounting, re ve nue s and e x pe nse s a re re cognize d a s follows:

R e ve nue re cognition: R e ve nue is re cognize d whe n cash is re ce ive d.
Ex pe nse re cognition: Ex pe nse is re cognize d whe n cash is paid.
Timing differences in recognizing revenues and expenses
The re a re pote ntial tim ing diffe re nce s in re cognizing re ve nue s and e x pe nse s be twe e n a ccrua l basis and cash ba sis
a ccounting.
Four types of timing differences
a. A ccrued Revenue: R e ve nue is re cognize d before cash is re ce ive d.

b. A ccrued Expense: Ex pe nse is re cognize d before cash is paid.
c. Deferred Revenue: R e ve nue is re cognize d after ca sh is re ce ive d.
d. Deferred Expense: Ex pe nse is re cognize d after cash is paid.
A n Example of A ccrued Revenue
Ex am ple : Products a re sold at $5,000 on Ma y 1, 2006 a nd ca sh is re ce ive d on Ma y 10, 2006.
May 1, 2006 Ma y 10, 2006
R e ve nue is re cognize d. C a sh is re ce ive d.
[Journal e ntry on Ma y 1, 2006]
De bit C re dit
Accounts re ce iva ble 5,000
Sale s 5,000
De bit C re dit
C a sh 5,000
accountinginfo.com/…/accrual-101.htm 1/4
Accounts re ce iva ble 5,000
A n Example of A ccrued Expense
Ex am ple : O n Ma y 1, 2006, C om pany A borrowe d $100,000 from a bank a nd prom ise d to pay 12% inte re st at the e nd of
e ach qua rte r.
May 31, 2006 June 30, 2006
Inte re st e x pe nse is re cognize d for C a sh is pa id at the e nd of the

Ma y. qua rte r.
De bit C re dit
C a sh 100,000
Borrowings from ba nk 100,000
De bit C re dit
Inte re st e x pe nse 1,000
Inte re st paya ble 1,000
$100,000 x 12% x 1/12 = $1,000 for e ach m onth.
Inte re st paya ble is a lia bility account.

C re dit side of inte re st pa yable (a liability a ccount) re pre se nts a n incre a se .
[Journal e ntry on June 30, 2006]
De bit C re dit
Inte re st e x pe nse 1,000
C re dit side of inte re st pa yable (a liability a ccount) re pre se nts a n incre a se .
De bit C re dit
C a sh 2,000
C om pany pa ys $2,000 a s inte re sts for May a nd June .

De bit side of inte re st pa yable (a liability a ccount) re pre se nts a de cre ase .
A n Example of Deferred Revenue
Ex am ple : O n Ma y 1, 2006, C om pany A had a ne w le ase contra ct with a te na nt a nd re ce ive d $6,000 for two m onth re nt.
Ma y 1, 2006 May 31 a nd June 30 2006
C a sh is re ce ive d. R e ve nue is re cognize d at the e nd of

May a nd June .
R e ve nue is re cognize d whe n C om pany A provide s se rvice . In this e x am ple , se rvice is provide d whe n tim e passe s.
De bit C re dit
C a sh 3,000
Une a rne d re nt re ve nue 3,000
Une a rne d re nt re ve nue is a liability a ccount.

C re dit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a n incre a se .
"Une arne d re ve nue" accounts re prese nt the am ount of cash re ce ived be fore se rvice s are provided. Since se rvices have
not be e n provide d ye t, it is not re ve nue .
"Une arne d re ve nue" accounts are liabilitie s of the com pany, be ca use the y should be paid back to the othe r party if
se rvice is not provide d in the future .
De bit C re dit
R e nt re ve nue 3,000
De bit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a de cre ase .
C re dit side of re nt re ve nue (a re ve nue account) re pre se nts an incre ase .
De bit C re dit
R e nt re ve nue 3,000
De bit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a de cre ase .
C re dit side of re nt re ve nue (a re ve nue account) re pre se nts an incre ase .
A n Example of Deferred Expense
Ex am ple : C om pa ny A purchase d a n insurance for a pe riod from May 1, 2006 to July 31, 2006 and paid $6,000 ca sh for
thre e m onth insura nce pre m ium .
Ma y 1, 2006 May 31, June 30, July 31, 2006
C ash is paid. Ex pe nse is re cognize d at the e nd of

May, June a nd July.
De bit C re dit
C a sh 6,000
P re paid insurance is a n a sse t a ccount.

De bit side of pre pa id insura nce (an asse t account) re pre se nts an incre ase .
De bit C re dit
De bit C re dit
[Journal e ntry on July 31, 2006]
De bit C re dit
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6/24/2009 Accounting Journal Entries

Accounting Study Guide

U.S. GA A P IFRS, IA S Accounting Topics

Journal Entries in Accounting

Examples of Journal Entries

What is a journal entry in A ccounting?

Journal e ntry is a n e ntry to the journal.

To re cord transactions, a ccounting syste m use s double -e ntry a ccounting.

Examples of Journal Entries

Ste ps Se lf-Q ue stions Answe rs

1 W ha t did C om pany A re ce ive ? C a sh.

4 W ha t is the a ccount nam e to re cord the sale s of products. Sale s.

[Journal entry to record transaction 1]

Examples of Journal Entries

Tra nsa ction 2: C om pa ny A purchase d supplie s a nd pa id $50 in cash.

Ste ps Se lf-Q ue stions Answe rs

1 W ha t did C om pany A re ce ive ? Supplie s.

4 W ha t did C om pany A pay? C a sh.

[Journal e ntry to re cord tra nsa ction 2]

Debits and Credits of A ccounts

Incre a se in a sse t a ccounts De cre ase in asse t accounts

Incre ase in e x pe nse accounts De cre a se in e x pe nse a ccounts

De cre ase in liability a ccounts Incre ase in liability a ccounts

De cre a se in e quity a ccounts Incre a se in e quity a ccounts

De cre a se in re ve nue accounts Incre a se in re ve nue accounts

Normal Balances of A ccounts

O wne rs' Equity

Read Journals Online

GAAP & CPA Exam Resources from Amazon.com

C opyright © 1999-2009 by C P Acla ss.com . TM All R ights R e se rve d.

Accounting Study Guide

U.S. GA A P IFRS, IA S Accounting Topics

Adjusting Journal Entries

Basics of Journal Entries

What is an adjusting journal entry?

Why do companies need adjusting journal entries?

Three steps of preparing adjusting journal entries

Ste p 2 Ide ntify the corre ct account ba la nce s.

C ash 1,000 (De bit Balance )

Sa le s 1,000 (C re dit Balance )

Accounts C orre ct C urre nt C orre ct - C urre nt

C a sh 1,000 100 900

Sa le s 1,000 100 900

Pre pa id insura nce 3,000

Ste p 2 Ide ntify the corre ct account ba la nce s.

Pre pa id insura nce 2,000 (De bit Ba la nce )

Accounts C orre ct C urre nt C orre ct - C urre nt

Insura nce e x pe nse 1,000 0 1,000

Pre pa id insura nce 2,000 3,000 (1,000)

To a djust the se diffe re nce s, following a djusting journal e ntry is ne e de d.

Insurance e x pe nse 1,000

P re paid insurance 1,000

Sb Accounting & Co.

Accounting Study Guide

U.S. GA A P IFRS, IA S Accounting Topics

Examples of Journal Entries

Basics of Journal Entries

Example 1: Financing A ctivities

Owner invested $10,000 in the company.

Description of Journal Entry

Results of Journal Entry

Example 2: Financing A ctivities

The company borrowed $20,000 from a bank.

Description of Journal Entry