Journal Entries & General Journal

Let's imagine that March has approached. It's your busiest month for GBD Fits operations, therefore you need to be ready to know how to record any transactions you incur into your general journal as journal entries!

The general journal is where every transaction a business makes is stored. These transactions are referred to as journal entries.

Let's get into figuring out how to write a journal entry!

How to write a journal entry

Imagine on March 1st, you decide it's time to get a new printing press to meet the demand of the month. Therefore, you make the following transaction:

Scenario: On March 1st, you purchase a new printing press for GBD Fits with cash for $1,000.

This is simple enough to understand... but how would a journal entry look for this transaction?

We're going to start with the answer (legit here's the answer)...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...and work our way backwards to understand how we got here!

What represents a debit vs. credit?

The first thing to understand is how to identify a debit vs. credit line within a journal entry.

Obviously, debit amounts can be seen in the 2nd column of the journal entry...

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

...and credit amounts can be seen in the 3rd column.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

But in terms of the transaction information itself, it's important to understand that you'll often see debit transactions 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.

How to read out-loud the journal entry

It's also important to understand how you might read a journal entry like this out-loud, so that you don't sound like a bozo in front of your peers.

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

How to know which accounts to use

This part truthfully just takes practice (check out our Practice Exam 1 with 31 questions + explanations), but for now it's important you understand the following:

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!

So, let's start with a blank journal entry...

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

...and build it up phrase-by-phrase (until we reach the answer I showed you above). We'll start with the first phrase:

Scenario: On March 1st, you purchase a new printing press for GBD Fits 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 printing press, which is a long term asset used to create our product.

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
RevenueCreditCreditDebit
ExpenseDebitDebitCredit

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???
     ??????

Concerning the amount that we'll debit it, it's currently not clear to us with this first phrase. Don't sweat it though, let's move on and find the amount later.

Scenario: On March 1st, you purchase a new printing press for GBD Fits with cash for $1,000.

If we're making the payment for this printing press with cash, that's going to impact our Cash account. How so? It'll decrease that account, and 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! Therefore, we'll place Cash in our journal entry like so:

TransactionDebitCredit
Equipment???
     Cash???

Concerning the amount that we'll credit Cash, it's currently not clear to us with this second phrase. Let's move on and figure it out with the last phrase:

Scenario: On March 1st, you purchase a new printing press for GBD Fits with cash for $1,000.

Okay, this makes things clear. The printing press (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 printing press cost us $1,000 in cash. Therefore, we're going to be crediting Cash by $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! That way, we follow double entry accounting principles!

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

Following the double entry accounting principles enables us to make sure the accounting equation remains true as we go through creating journal entries. Remember, the accounting equation looks like so:

Assets = Liabilities + Equity

A couple tougher journal entries you'll face...

The above journal entry is an easy one. There's two addition scenarios that are important for you to understand how to face!

Journal entries with more than one debit / credit

Imagine the following scenario:

Scenario: On March 5th, Johnny buys a GBD hoodie. The hoodie costs $50, and Johnny pays you $20 cash at the time of purchase. He promises to pay back the remaining $30 at a later date.

How would you record this journal entry?

Well, let's go phrase-by-phrase and figure out!

Scenario: On March 5th, Johnny buys a GBD hoodie. The hoodie costs $50, and Johnny pays you $20 cash at the time of purchase. He promises to pay back the remaining $30 at a later date.

What this tells me right here is that we're making a sale, which will result in our Sales Revenue account increasing. Remember, a revenue account increasing results in a credit to it! (See the normal balance table below.)

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

Therefore, we'll place Sales Revenue into our journal entry like so:

TransactionDebitCredit
??????
??????
     Sales Revenue???

What amount will we credit Sales Revenue by? $50, since that's how much the hoodie cost!

TransactionDebitCredit
??????
??????
     Sales Revenue$50

Now for the next phrase:

Scenario: On March 5th, Johnny buys a GBD hoodie. The hoodie costs $50, and Johnny pays you $20 cash at the time of purchase. He promises to pay back the remaining $30 at a later date.

Okay word, so Johnny is dishing us $20 right now for this hoodie. That means that we're going to increase our Cash account, which means we'll debit it since it's an asset! (See the normal balance table below.)

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

This'll look like so in our journal entry!

TransactionDebitCredit
Cash???
??????
     Sales Revenue$50

By how much should we debit Cash? $20, since that's how much Johnny is giving us in cash at the time of purchase!

TransactionDebitCredit
Cash$20
??????
     Sales Revenue$50

Onto the last phrase:

Scenario: On March 5th, Johnny buys a GBD hoodie. The hoodie costs $50, and Johnny pays you $20 cash at the time of purchase. He promises to pay back the remaining $30 at a later date.

Okay, this ones a little tricky. What account are we going to use here, if we're getting paid at a later date?

Accounts Receivable to the rescue!

Use Accounts Receivable whenever a customer promises to pay back at a later date (a.k.a. makes the purchase on credit).

If you remember from Assets, Liabilities & Equity, Accounts Receivable is an asset. The promise from a customer to pay us back at a later date is something that provides us with economic value.

Johnny promising to pay us at a later date increases our Accounts Receivable, which means we'll debit it, since it's an asset! (Remember, assets have a normal debit balance!)

That'll look like so in our journal entry:

TransactionDebitCredit
Cash$20
Accounts Receivable???
     Sales Revenue$50

Now, how much are we going to debit Accounts Receivable? Well, Johnny is promising to pay us $30 back in the future, therefore we'll debit Accounts Receivable by that amount!

TransactionDebitCredit
Cash$20
Accounts Receivable$30
     Sales Revenue$50

This journal entry, since it's debiting two accounts (Cash & Accounts Receivable), is what we call a "compound journal entry".

A compound journal entry is one in which there are more than one debits or credits occuring in the same transaction. The sum of the debits and credits for the transaction still must equal each other!

Before moving on, let's verify that the sum of our debits and credits in this journal entry still equal each other:

TransactionDebitCredit
Cash$20
Accounts Receivable$30
     Sales Revenue$50
Total$50$50

Awesome, this means we've successfully written this journal entry! Let's move onto the next type of journal entry you should be ready for...

Paying for something on credit

Imagine the following scenario:

Scenario: On March 7th, you realize that you need some more base-model hats. You purchase 10 hats for $75 on credit, promising that you'll pay the vendor back soon.

In this situation, we're not paying with cash, we're paying on credit. We'll get to what that means in a second... for now let's go phrase-by-phrase and build up this journal entry!

Scenario: On March 7th, you realize that you need some more base-model hats. You purchase 10 hats for $75 on credit, promising that you'll pay the vendor back soon.

What this tells me here is that we're increasing our Inventory, since these hats will be used as the end-product for customers soon. (We're NOT increasing Supplies here! These hats aren't for daily operations of the business!)

Inventory is an asset, therefore increasing it means that we'll debit it! (Remember: assets have a normal debit balance!)

That'll look like so in our journal entry:

TransactionDebitCredit
Inventory???
     ??????

Now, what account are we going to credit? In the past for purchases, we've credited the Cash account. However, in this case, we're not paying with cash. We're paying "on credit".

Scenario: On March 7th, you realize that you need some more base-model hats. You purchase 10 hats for $75 on credit, promising that you'll pay the vendor back soon.

What account will we use for this?

Use the Accounts Payable account whenever you purchase something on credit, or promise to pay the vendor back later.

Accounts Payable is a liability account. When we make a payment "on credit", we're increasing our liability, since that amount is something that we owe back to the vendor at a later date.

Therefore, since we're increasing a liability account (Accounts Payable), that means we're going to credit it, since liabilities have a normal credit balance!

TransactionDebitCredit
Inventory???
     Accounts Payable???

Now, how much are we going to debit Inventory / credit Accounts Payable? Based on the problem, we can see that the hats cost us $75...

Scenario: On March 7th, you realize that you need some more base-model hats. You purchase 10 hats for $75 on credit, promising that you'll pay the vendor back soon.

...therefore, that adds a value of $75 to our Inventory...

TransactionDebitCredit
Inventory$75
     Accounts Payable???

...and means that we have $75 that we'll need to pay back to the vendor at a later date (Accounts Payable).

TransactionDebitCredit
Inventory$75
     Accounts Payable$75

Applying journal entries to the General Journal

Throughout this article, we've had the following 3 transactions resulting in their respective journal entries:

Scenario: On March 1st, you purchase a new printing press for GBD Fits with cash for $1,000.

TransactionDebitCredit
Equipment$1,000
     Cash$1,000

Scenario: On March 5th, Johnny buys a GBD hoodie. The hoodie costs $50, and Johnny pays you $20 cash at the time of purchase. He promises to pay back the remaining $30 at a later date.

TransactionDebitCredit
Cash$20
Accounts Receivable$30
     Sales Revenue$50

Scenario: On March 7th, you realize that you need some more base-model hats. You purchase 10 hats for $75 on credit, promising that you'll pay the vendor back soon.

TransactionDebitCredit
Inventory$75
     Accounts Payable$75

Now, how can we place these into our general journal?

The general journal is literally just an accumulation of all the journal entries that happen in a given period.

For sake of simplicity, let's assume that the above 3 transactions were the only that occurred in March. Therefore, our general journal would look like so for the month of March:

MARCH

DateTransactionDebitCredit
3-1Equipment$1,000
     Cash$1,000
New printing press
3-5Cash$20
Accounts Receivable$30
     Sales Revenue$50
Johnny's GBD hoodie, paid with cash and credit
3-7Inventory$75
     Accounts Payable$75
10 base-model hats for inventory

Noticing the dates

For the sake of zoning in on how to write the journal entries, we didn't pay attention to including the dates. However, in your General Journal, it's important to document the date in which each transaction occurred.

MARCH

DateTransactionDebitCredit
3-1Equipment$1,000
     Cash$1,000
New printing press
3-5Cash$20
Accounts Receivable$30
     Sales Revenue$50
Johnny's GBD hoodie, paid with cash and credit
3-7Inventory$75
     Accounts Payable$75
10 base-model hats for inventory

Noticing the descriptions

Typically, a general journal contains way more than 3 journal entries. It can get really confusing keeping track of all of them. That's why it's crucial to throw a little description of what each journal entry represents below the respective entry!

MARCH

DateTransactionDebitCredit
3-1Equipment$1,000
     Cash$1,000
New printing press
3-5Cash$20
Accounts Receivable$30
     Sales Revenue$50
Johnny's GBD hoodie, paid with cash and credit
3-7Inventory$75
     Accounts Payable$75
10 base-model hats for inventory

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