Skip to main content
Business LibreTexts

4.2: Bookkeeping Journal Entries

  • Page ID
    45818
  • \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)

    \( \newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\)

    ( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\)

    \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)

    \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\)

    \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)

    \( \newcommand{\Span}{\mathrm{span}}\)

    \( \newcommand{\id}{\mathrm{id}}\)

    \( \newcommand{\Span}{\mathrm{span}}\)

    \( \newcommand{\kernel}{\mathrm{null}\,}\)

    \( \newcommand{\range}{\mathrm{range}\,}\)

    \( \newcommand{\RealPart}{\mathrm{Re}}\)

    \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\)

    \( \newcommand{\Argument}{\mathrm{Arg}}\)

    \( \newcommand{\norm}[1]{\| #1 \|}\)

    \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\)

    \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\AA}{\unicode[.8,0]{x212B}}\)

    \( \newcommand{\vectorA}[1]{\vec{#1}}      % arrow\)

    \( \newcommand{\vectorAt}[1]{\vec{\text{#1}}}      % arrow\)

    \( \newcommand{\vectorB}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \( \newcommand{\vectorC}[1]{\textbf{#1}} \)

    \( \newcommand{\vectorD}[1]{\overrightarrow{#1}} \)

    \( \newcommand{\vectorDt}[1]{\overrightarrow{\text{#1}}} \)

    \( \newcommand{\vectE}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash{\mathbf {#1}}}} \)

    \( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \)

    \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)

    \(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)

    Learning Outcomes

    • Construct bookkeeping journal entries based on given parameters

    Entering Transactions in the Journal

    The financial statements that are the end product of the accounting cycle are only as good as the journal entries that happen at the beginning of the cycle. In order to better understand how bookkeeping entries are constructed, here is a simplified case study of the accounting process, starting with the daily log of transactions—the journal.

    On January 10, you start a gift shop called Holiday Gifts. The first thing you do file for an assumed business name with the state and then, when you get the business name, you go to a local bank and make a $10,000 transfer from your personal checking to a new business checking account. In order to keep track of your financial results, you decided to follow GAAP and best bookkeeping practices, so you buy an accounting journal and make the following entry:

    Jan   Debit Credit
    10 Checking account 5,000  
      Capital Contributions   5,000

    Note that you have written the debit portion of the entry first, and that you indented the account name for the credit entry, according to common practice. You decide to wait for a few more transactions before posting to the general ledger.

    On the 12th, you pay insurance in the amount of $600 and you journalize the transaction as follows:

    12 Insurance Expense 600  
      Checking Account   600

    On January 15 you paid $1,000 in rent for the next 5 months ($200 per month for January through May).

    The journal entry to record both the rent paid in advance and the rent for the current month would be:

    15 Prepaid Rent (an asset) 800  
      Rent Expense (for January) 200  
      Checking Account   1,000

    On January 16 you bought 10 picnic baskets to resell. The vendor gave you 30 days to pay in full. You paid $60 each for them and you plan to resell them for $100 each.

    The journal entry to record the purchase of inventory would be:

    16 Merchandise Inventory 600  
      Accounts Payable (a liability)   600

    On January 20 you hired a part-time sales person to mind the store so that you could spend time building the customer list. Your sales person is paid twice a month on the 10th and 25th and will start immediately.

    No journal entry in needed for this activity since it did not rise to the level of a financial transaction.

    On January 21 you borrowed $15,000 from the bank for working capital.

    21 Checking Account 15,000  
      Note Payable   15,000

    On January 30 you sold 4 picnic baskets to various cash-paying customers.

    30 Checking Account 400  
      Merchandise Sales (a revenue account)   400
    30 Cost of Goods Sold (an expense) 240  
      Inventory (an asset)   240

    Note in the last entry on the 30th we reduced the amount of inventory we are reporting as having on hand (an assets) by the amount of picnic baskets we sold, and matched that as an expense against the sales price. That specific matching concept results in an amount accountants call Gross Profit. Gross profit is the sales price of an item less its cost. In this case, the Gross Profit per item is $40, and the total Gross Profit for January was $160.

    On January 30 you paid $2,750 cash for a small travel trailer that will serve as a mobile store. You expect it to last for five years and then you’ll sell it for about $750.

    20 Furniture and equipment (an asset) 2,750  
      Checking account   2,750

    Posting Entries to the Accounts

    Once all the transactions for the month are journalized, they are posted to the ledger pages. Each journal entry is transferred line by line to the appropriate account. For instance, the cash ledger would appear like this:

    General Ledger
    Checking Account #1101
    Jen Ref Debit Credit Balance
    Opening Balance 0   0
    10 GJ1 5,000   5,000
    12 GJ1   600 4,400
    15 GJ1   1,000 3,400
    20 GJ1   2,750 650
    21 GJ1 15,000   15,650
    30 GJ2 400   16,050

    Notice that in the cash account, which is an asset account, a debit (entry to the left side of an account) represents an increase, and a credit (entry to the right side of the account) represents a decrease, and the balance is the combination of the two. This is the exact opposite for accounts on the right side of the accounting equation:

    Assets = Liabilities + Equity

    In liability and equity accounts that represent increases in those major categories, account balances are increased by a credit and account balances are decreased by a debit. The opposite is true for accounts that decrease those major categories.

    In the ledgers, the reference number is to the page in the journal (also called the General Journal) where the entry is found. In the journal, the reference number is the company-assigned account number to which the journal entry is posted. Assume all the following entries have been posted to the appropriate ledger “pages”. The highlighted entries are the ones posted to the Cash account ledger. Notice that the ledger provides a running total but the journal does not, since it is chronological by transaction, rather than by account.

    General Journal Page 1
    Jan   Ref Debit Credit
    10 Checking Account 1101 5,000  
      Capital Contributions 3310   5,000
             
    12 Insurance Expense 5520 600  
      Checking Account 1101   600
             
    15 Prepaid Rent 1320 800  
      Rent Expense 5510 200  
      Checking Account 1101   1,000
             
    16 Merchandise Inventory 1210 600  
      Accounts Payable 2101   600
             
    20 Furniture and Equipment 1620 2,750  
      Checking Account 1101   2,750
             
    21 Checking Account 1101 15,000  
      Note Payable 2550   15,000
    General Journal Page 2
    Jan   Ref Debit Credit
    30 Checking Account 1101 400  
      Merchandise Sales 4510   400
             
    30 Cost of Goods Sold 5200 240  
      Merchandise Inventory 1210   240
             

    The Trial Balance

    The next step in the accounting cycle is to create a trial balance, to make sure that all the debit entries are balanced out by credit entries. The trial balance is simply a list of all the accounts with the ending balances in the correct column, debit or credit, taken right from the general ledger.

    On February 3, you calculate that your employee earned $500 in wages from January 20 through January 31, to be paid on the 10th of February, and you record an Adjusting Journal Entry (AJE) to match January wages earned (incurred) with January revenue.

    31 Wage Expense 500  
      Wages Payable (a liability)   500

    Note that you are backdating this AJE to the last day of January so that it shows up in the correct month on the financial statements. This is called an accrual. It is written in the journal and posted to the ledger. Page 2 of the journal would now look like this:

    General Journal Page 2
    Jan   Ref Debit Credit
    30 Checking Account 1101 400  
      Merchandise Sales 4510   400
             
    30 Cost of Goods Sold 5200 240  
      Inventory 1210   240
             
    31 Wage Expense 5300 500  
      Wages Payable 2201   500
             

    Wages decrease equity, since they offset revenue. Equity is on the right side of the accounting equation which means that an increase to equity is shown by a credit entry and a decease is shown by a debit entry. Wages always decrease equity, so wage expense, in fact, every expense account, is always debited and always has a debit balance.

    The Adjusted Trial Balance

    Once all of the adjusting journal entries are posted to the ledgers, the accountant runs one final check of debits and credits, called the adjusted trial balance. In this simplified example, the adjusted trial balance would look like this:

    Adjusted Trial Balance as of Jan 31, 20XX
        Debit Credit
    1101 Checking 16,050  
    1210 Merchandise Inventory 360  
    1320 Prepaid Rent 800  
    1620 Furniture and Equipment 2,750  
    2101 Accounts Payable   600
    2201 Wages Payable   500
    2550 Notes Payable   15,000
    3310 Capital Contributions   5,000
    4510 Merchandise Sales   400
    5200 Cost of Goods Sold 240  
    5300 Wage Expense 500  
    5510 Rent Expense 200  
    5520 Insurance Expense 600  
      Total debits must equal total credits 21,500 21,500

    These transactions, including the adjusting entries, give us enough information to create the adjusted trial balance so that we can move on to the next step in the accounting process—creating the financial statements.


    This page titled 4.2: Bookkeeping Journal Entries is shared under a CC BY 4.0 license and was authored, remixed, and/or curated by Lumen Learning via source content that was edited to the style and standards of the LibreTexts platform.