Imagine on March 1st, you decide it's time to get a new lemon squeezer for your lemonade stand to meet the demand of the month. In turn, you make the following transaction:
Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.
This is simple enough to understand... but how would a journal entry look for this transaction?
Let's start with the answer...
Transaction | Debit | Credit |
---|---|---|
Equipment | $1,000 | |
Cash | $1,000 |
...so that we can understand a few critical points surrounding journal entries:
Now that we've addressed the critical points, imagine we were given a blank journal entry instead:
Transaction | Debit | Credit |
---|---|---|
??? | ??? | |
??? | ??? |
How would we go about getting to the final answer above?
The best way to determine which accounts to debit vs. credit in a journal entry is to read the question phrase-by-phrase and gradually build up your journal entry!
Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.
Transaction | Debit | Credit |
---|---|---|
Equipment | ??? | |
??? | ??? |
Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.
Transaction | Debit | Credit |
---|---|---|
Equipment | ??? | |
Cash | ??? |
Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.
Transaction | Debit | Credit |
---|---|---|
Equipment | $1,000 | |
Cash | $1,000 |
You might be wondering: are we allowed to debit and credit assets?
Yes! The reason is because one asset is increasing...
Transaction | Debit | Credit |
---|---|---|
Equipment | $1,000 | |
Cash | $1,000 |
...while the other asset is decreasing by the same amount.
Transaction | Debit | Credit |
---|---|---|
Equipment | $1,000 | |
Cash | $1,000 |
All that matters is that the sum of our debits equal the sum of our credits!
Transaction | Debit | Credit |
---|---|---|
Equipment | $1,000 | |
Cash | $1,000 | |
Total | $1,000 | $1,000 |
That way, we follow double entry accounting principles, which enables us to make sure the accounting equation remains true as we go through creating journal entries!
Assets = Liabilities + Equity