Journal Entries

Analyzing transactions and recording them as journal entries is the first

step in the accounting cycle. It begins at the start of an accounting period
and continues during the whole period. Transaction analysis is a process
which determines whether a particular business event has an economic
effect on the assets, liabilities or equity of the business. It also involves
ascertaining the magnitude of the transaction i.e. its currency value.
After analyzing transactions, accountants classify and record the events
having economic effect via journal entries according to debit-credit
rules. Frequent journal entries are usually recorded in specialized
journals, for example, sales journal and purchases journal. The rest are
recorded in a general journal.
The following example illustrates how to record journal entries:
Example
Company A was incorporated on January 1, 2010 with an initial capital
of 5,000 shares of common stock having Rs20 par value. During the first
month of its operations, the company engaged in following transactions:
Date Transaction
Jan 2 An amount of Rs36,000 was paid as advance rent for three months.
Jan 3 Paid Rs60,000 cash on the purchase of equipment costing Rs80,000. The remaining
amount was recognized as a one year note payable with interest rate of 9%.
Jan 4 Purchased office supplies costing Rs17,600 on account.
Jan 13 Provided services to its customers and received Rs28,500 in cash.
Jan 13 Paid the accounts payable on the office supplies purchased on January 4.
Jan 14 Paid wages to its employees for first two weeks of January, aggregating Rs19,100.
Jan 18 Provided Rs54,100 worth of services to its customers. They paid Rs32,900 and promised
to pay the remaining amount.
Jan 23 Received Rs15,300 from customers for the services provided on January 18.
Jan 25 Received Rs4,000 as an advance payment from customers.
Jan 26 Purchased office supplies costing Rs5,200 on account.
Jan 28 Paid wages to its employees for the third and fourth week of January: Rs19,100.
Jan 31 Paid Rs5,000 as dividends.
Jan 31 Received electricity bill of Rs2,470.
Jan 31 Received telephone bill of Rs1,494.
Jan 31 Miscellaneous expenses paid during the month totaled Rs3,470
The following table shows the journal entries for the above events.

Date Account Debit Credit

Jan 1 Cash 100,000
Common Stock 100,000
Jan 2 Prepaid Rent 36,000
Cash 36,000
Jan 3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
Jan 4 Office Supplies 17,600
Accounts Payable 17,600
Jan 13 Cash 28,500
Service Revenue 28,500
Jan 13 Accounts Payable 17,600
Cash 17,600
Jan 14 Wages Expense 19,100
Cash 19,100
Jan 18 Cash 32,900
Accounts Receivable 21,200
Service Revenue 54,100
Jan 23 Cash 15,300
Accounts Receivable 15,300
Jan 25 Cash 4,000
Unearned Revenue 4,000
Jan 26 Office Supplies 5,200
Accounts Payable 5,200
Jan 28 Wages Expense 19,100
Cash 19,100
Jan 31 Dividends 5,000
Cash 5,000
Jan 31 Electricity Expense 2,470
Utilities Payable 2,470
Jan 31 Telephone Expense 1,494
Utilities Payable 1,494
Jan 31 Miscellaneous Expense 3,470
Cash 3,470
At the end of the period, all the journal for the period are posted to the ledger accounts.

Ledger Accounts

After posting all the journal entries, the balance of each account is calculated. The balance of an asset,
expense, contra-liability and contra-equity account is calculated by subtracting the sum of its credit side
from the sum of its debit side. The balance of a liability, equity and contra-asset account is calculated the
opposite way i.e. by subtracting the sum of its debit side from the sum of its credit side.
Example
The ledger accounts shown below are derived from the journal entries of Company A.

Asset Accounts

Cash Accounts Receivable

Rs100,000 Rs36,000 Rs21,200 Rs15,300

28,500 60,000

32,900 17,600

15,300 19,100

4,000 19,100

5,000

3,470

Rs20,430 Rs5,900

Office Supplies Prepaid Rent

Rs17,600 Rs36,000

5,200

Rs22,800 Rs36,000

Equipment

Rs80,000

Rs80,000

Liability Accounts

Accounts Payable Notes Payable

Rs17,600 Rs17,600 Rs20,000

5,200

Rs5,200 Rs20,000

Utilities Payable Unearned Revenue

Rs2,470 Rs4,000
 1,494

Rs3,964 Rs4,000

Equity Accounts

Common Stock

Rs100,000

Rs100,000

Revenue, Dividend and Expense Accounts

Service Revenue Dividend

Rs28,500 Rs5,000

54,100

Rs82,600 Rs5,000

Wages Expense Miscellaneous Expense

Rs19,100 Rs3,470

19,100

Rs38,200 Rs3,470

Electricity Expense Telephone Expense

Rs2,470 Rs1,494

Rs2,470 Rs1,494

The ledger accounts step of accounting cycle completes here. The next step is the preparation
of unadjusted trial balance.

Trial Balance

A Trial Balance is a list of the balances of ledger accounts which is created after the preparation
of adjusting entries. trial balance contains balances of revenues and expenses along with those of assets,
liabilities and equities. trial balance can be used directly in the preparation of the statement of changes in
stockholders' equity, income statement and the balance sheet. However it does not provide enough
information for the preparation of the statement of cash flows.
Example
The following adjusted trial balance was prepared after posting the adjusting entries of Company A to its
general ledger and calculating new account balances:
Company A
Adjusted Trial Balance
January 31, 2010
Debit Credit
Cash Rs20,430 −
Accounts Receivable 5,900 −
Office Supplies 4,320 −
Prepaid Rent 24,000 −
Equipment 80,000 −
Accumulated Depreciation − Rs1,100
Accounts Payable − 5,200
Utilities Payable − 3,964
Unearned Revenue − 1,000
Interest Payable − 150
Notes Payable − 20,000
Common Stock − 100,000
Service Revenue − 85,600
Wages Expense 38,200 −
Supplies Expense 18,480 −
Rent Expense 12,000 −
Miscellaneous Expense 3,470 −
Electricity Expense 2,470 −
Telephone Expense 1,494 −
Depreciation Expense 1,100 −
Interest Expense 150 −
Dividend 5,000 −
Total Rs217,014 Rs217,014
The totals of an adjusted trial balance must be equal. Any difference indicates that there is some error in
the journal entries or in the ledger or in the calculations.