Journal entries

Journal entries summarize the accounts involved in a transaction, whether those accounts increased or decreased and the associated amounts. Each journal entry has its debit amounts equal to its credit amounts to ensure that the accounting equation is maintained. Now preparation of a journal entry involves a three-step process. 

Identify which accounts are involved, for each account, determine if it's increased or decreased, and for each account, determine by how much it changed. Now by tradition, in a journal entry, the account being debited is listed first and the account being credited is listed second. Let's now gain some experience with journal entries by recording, in journal entry format, the transactions for Hannah Collister and her business, Hannah Market. 

Transaction one, invested $700,000 of her own cash in the business. The two accounts involved are cash and paid-in capital. Two, the asset, cash, is increased, so cash must be debited. Paid-in capital also increased, representing an increase in Hannah's owners' equity in the business, and because paid-in capital is an equity account and equities increase with credits, paid-in capital must be credited. And three, the amount involved is $700,000. 

Transaction two, borrowed $300,000 cash from the bank. One, the two accounts involved are cash and bank loan payable. Two, the asset cash is increased with a debit. Bank loan payable also increased because Hannah now owes more to the bank and because bank loan payable is a liability and liabilities increase with credits, bank loan payable must be credited. Three, the amount involved, $300,000. 

Transaction three, purchase land, a building, and equipment for a total of $2 million. Hannah paid $100,000 down in cash and the remaining $1.9 million is financed with a mortgage. One, the accounts are cash, land, building, and equipment, and mortgage payable. Two, cash is decreased with a credit. The asset land, buildings, and equipment is increased with a debit. Mortgage payable also increased because Hannah now owes more in the form of a mortgage, so the liability, mortgage payable, must be credited. Three, the amounts involved are $2 million for land, buildings, and equipment, $100,000 for cash, and $1.9 million for mortgage payable. 

Transaction four, purchased inventory items for resale for a total of $1.3 million. The entire amount was put on supplier accounts, so no cash was paid at the time of purchase. One, the accounts involved are inventory and accounts payable. Two, the asset inventory is increased with a debit. The liability accounts payable is increased with a credit because Hannah now owes more to her suppliers, and three, the amount involved is $1.3 million. 

Transaction five, sold inventory costing $800,000 to retail customers for $1.1 million. The customers paid $200,000 in cash and the remaining $900,000 was put on the customers' accounts. One, this transaction involves both a revenue account, sales, and an expense account, cost of goods sold. This transaction also involves cash, accounts receivable, and inventory. Two, the assets, cash and accounts receivable, are increased with debits. Sales, a revenue equity account, is increased by a credit. The asset inventory is decreased with a credit. Finally, the expense cost of goods sold which is an equity account is debited to reflect the fact that the consumption of the asset inventory in this business transaction represents a reduction in equity. Three, the amounts involved are $200,000 for cash and $900,000 for accounts receivable, representing total sales of $1.1 million. The amount of inventory and cost of goods sold is $800,000. 

Transaction six, paid employees a total of $170,000 cash for wages. The accounts involved are cash and wage expense. Two, the asset cash is decreased with a credit. Wages expense, which is an equity account, is debited to reflect the fact that the consumption of the asset, cash, to pay employee wages represents a reduction in the equity of the company. And three, the amount involved is $170,000. 

All right, after all of this practice, you are now officially a debit and credit expert. Well done.