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Journal Entries

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...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...so that we can understand a few critical points surrounding journal entries:

You'll see debit transactions completely left-aligned and at the top of the journal entry...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...whereas credit transactions will have an indent and are at the bottom of the journal entry.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

In a journal entry, debits will be completely left-aligned and at the top, whereas credits will be indented and at the bottom.

In terms of the amounts for these debits and credits, we can see the debit amounts in the 2nd column...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...and credit amounts in the 3rd column.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

If we wanted to read this journal entry verbally, we'd say that it "contains a debit to Equipment of $1,000...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...and a credit to Cash of $1,000."

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

Now that we've addressed the critical points, imagine we were given a blank journal entry instead:

TransactionDebitCredit
??????
     ??????

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!

Phrase-by-phrase

Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.

This immediately tells me that we're going to be increasing our Equipment account. Why? Because we're obtaining a lemon squeezer, which is a long term asset used to create our product (lemonade).

Therefore, since we're increasing our Equipment account (which is an asset) this means that we'll debit it. (See the normal balance table below.)

Account TypeNormal BalanceIncreases with a...Decreases with a...
AssetDebitDebitCredit
LiabilityCreditCreditDebit
EquityCreditCreditDebit

Remember: all assets have a normal debit balance, therefore debiting them increases them! Therefore, we'll place Equipment into our journal entry like so:

TransactionDebitCredit
Equipment???
     ??????
TransactionDebitCredit
Equipment???
     ??????

Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.

If we're making the payment for this lemon squeezer with cash, that's going to impact our Cash account. How so? It'll decrease that account, since we're paying cash out of our balance.

Since Cash is an asset account that means we must credit it. (See the normal balance table below.)

Account TypeNormal BalanceIncreases with a...Decreases with a...
AssetDebitDebitCredit
LiabilityCreditCreditDebit
EquityCreditCreditDebit
RevenueCreditCreditDebit
ExpenseDebitDebitCredit

Remember: assets have a normal debit balance, therefore crediting them decreases them! So, we'll place Cash in our journal entry like so:

TransactionDebitCredit
Equipment???
     Cash???
TransactionDebitCredit
Equipment???
     Cash???

Scenario: On March 1st, you purchase a new lemon squeezer for your lemonade stand with cash for $1,000.

This phrase makes things clear in terms of dollar amount. The lemon squeezer (Equipment) has a value of $1,000, therefore we're going to be debiting Equipment by $1,000.

TransactionDebitCredit
Equipment$1,000
     Cash???

In addition, the lemon squeezer cost us $1,000 in cash. Therefore, we're going to be crediting Cash by $1,000.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000
TransactionDebitCredit
Equipment$1,000
     Cash$1,000

Wait... so we debited and credited an asset?

You might be wondering: are we allowed to debit and credit assets?

Yes! The reason is because one asset is increasing...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...while the other asset is decreasing by the same amount.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

All that matters is that the sum of our debits equal the sum of our credits!

TransactionDebitCredit
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