BOOKKEEPING 101:HOW TO RECORD

JOURNAL ENTRIES! (INCLUDES

EXAMPLES)

Andrew Li

Double Entry Bookkeeping Companies use a double-entry system to record

transactions

Elements of the accounting equation are represented by accounts which are contained in the general ledger

The General Ledger is a collection of accounts (i.e. inventory, payables, etc) used to keep track of increases and decreases in those accounts

The General Ledger We will represent the general ledger

through “T-accounts”

Account Name (i.e. Inventory)Beginning Balance

Additions Subtractions

Ending Balance

Debits and Credits Accountants use a system of debits and

credits to increase/decrease account balances in the general ledger

Debits represent the left side of the account and credits represent the right side

Account Name (i.e. Inventory)Debit Side Credit Side

Debits and Credits dAssets = Liabilities + Capital

ContributionRetained Earnings

Debit (+)

Credit (-)

Debit (-)

Credit(+)

Debit (-)

Credit(+)

Debit (-)

Credit (+)

Remember retained earnings represents the cumulative revenue and expenses of the

business

Revenue Expenses

Debit (-)

Credit (+)

Debit (+)

Credit (-)

Debits and Credits The debits must equal the credits in

every transaction (hence the “dual-entry accounting system”)

Journal Entries Accountants record transactions in a

journal that provides a record of all economic events affecting the Company.

Each “journal entry” is expressed in terms of debits and credits to accounts affected by the transactions.

Journal Entry Examples1. You invest $40,000 to open a business

Debit Credit

Cash $40,000

Equity $40,000

Journal Entry Examples2. You borrowed $40,000 from the bank

Debit Credit

Cash $40,000

Debt $40,000

Journal Entry Examples3. $2,000 worth of supplies were

purchased on your credit card.

Debit Credit

Supplies $2,000

Accounts Payable $2,000

Journal Entry Examples4. You performed $20,000 worth of

services for customers (on credit)

Debit Credit

Accounts Receivable $20,000

Revenue $20,000

Journal Entry Examples5. $1,000 was paid to your supply vendor

Debit Credit

Accounts Payable $1,000

Cash $1,000

Journal Entry Examples6. You pay a $5,000 salary for an

employee (in cash)

Debit Credit

Salary Expense $5,000

Cash $5,000

Journal Entry Examples7. You purchase equipment for $12,000 in

cash

Debit Credit

Equipment $12,000

Cash $12,000

Journal Entry Examples8. You purchased $50,000 of inventory on

credit

Debit Credit

Inventory $50,000

Accounts Payable $50,000

Journal Entry Examples9. You sold inventory costing $15,000 for

$25,000 in cash

Debit Credit

Cash $25,000

Revenue $25,000

Cost of Goods Sold $15,000

Inventory $15,000

Journal Entry Examples10. You sold inventory costing $5,000 for

$7,500 on credit

Debit Credit

Accounts Receivable $7,500

Revenue $7,500

Cost of Inventory $5,000

Inventory $5,000

Journal Entry Examples11. You received $1,000 from a customer

payment of a receivable

Debit Credit

Cash $1,000

Accounts Receivable $1,000

Journal Entry Examples12. You paid a cash dividend to

shareholders of $1,000

Debit Credit

Retained Earnings $1,000

Cash $1,000

Adjusting Entries Even when all transactions and

economic events have been recorded, some accounts still need to be updated.

Adjusting entries are recorded at the end of the period when financial statements are prepared.

Adjusting Entries Adjusting entries are required to implement

the accrual method of accounting to satisfy the realization principle and the matching principle.

In other words, adjusting entries help ensure revenue and expenses are recognized in the proper period, regardless of when cash is received or paid.

Adjusting Entries Adjusting entries are needed for the

following situations

Prepayments

Accruals

Estimates

Prepayments Prepayments occur when cash flow

precedes expense or revenue recognition.

Prepaid expenses represent assets recorded when a cash disbursement creates benefits beyond the current period.

Prepayment ExamplesAt the beginning of the year, you prepaid 3 years of

rent for $3,000. What adjusting journal entry is needed at the end of the year?

Debit CreditRent

Expense $1,000

Prepaid Rent $1,000

Debit CreditPrepaid

Rent $3,000

Cash $3,000

Prepayment ExamplesAt the beginning of the year, you purchase

equipment for $60,000. The equipment has a life of 6 years. What adjusting journal entry is needed at the end of the year?

Debit CreditDepreciation

Expense $10,000

Accumulated Depreciation $10,000

Debit CreditEquipment $60,000

Cash $60,000

Unearned Revenue Unearned revenue is created when a

company receives cash from a customer before providing the good/service.

This liability reflects an obligation to deliver that good/service.

Unearned RevenueAt the beginning of the year, you receive $30,000

for 3 years of rent on your rental property. At the end of the year, what adjusting entry is needed?

Debit CreditUnearned

Rent $10,000

Rental Revenue $10,000

Debit CreditCash $30,000

Unearned Rent $30,000

Accruals Accruals occur when cash flow comes

after expense or revenue recognition

Accrued Liabilities Accrued liabilities represent liabilities

recorded when an expense has been incurred prior to cash payment.

Accrued Liabilities ExampleAt the end of the year, your employee

earns a $5,000 bonus that you will pay at the beginning of the next year.

Debit Credit

Salaries Expense $5,000

Salaries Payable $5,000

Accrued Receivables Accrued receivables involve situations

when the revenue is earned in a period prior to the cash receipt.

Accrued Receivables Example

On 06/30/16, you loan a company $100,000 at 1.0% interest payable annually. What is the adjusting journal entry needed on 12/31/16?

Debit Credit

Interest Receivable $500

Interest Revenue $500

Estimates Accountants must often make estimates

in order to comply with the accrual model of accounting.

Estimates ExampleAt the end of the year, you have $100,000 of

receivables outstanding from customers. However, you estimate only $95,000 will be collectible. What is the adjusting journal entry?

Debit Credit

Bad Debt Expense $5,000

Allowance For Bad Debts

$5,000

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