How to Prepare Journal Entries to Record Transactions

Companies record all transactions as journal entries in the accounting books.
Companies record all transactions as journal entries in the accounting books. (Image: Erik Snyder/Lifesize/Getty Images)

Most businesses use a double-entry system of accounting to record all transactions that occur. This is done by using a combination of debits and credits, various accounts and the amounts of the transactions. Businesses create a chart of accounts, which lists all accounts used. Each transaction is placed into a specific category. The categories used in accounting are assets, liabilities, equity, revenues and expenses. Each category has rules regarding how transactions are recorded and how debits and credits affect them.

Understand the rules of debits and credits. Asset and expense accounts have normal debit balances, which means that debits increase their balances and credits decrease them. Liability, equity and revenue accounts have normal credit balances, meaning credits increase their balances and debits decrease them.

Use a general journal to record journal entries. The general journal is a book that is designed for this purpose and contains blanks to fill in. Whenever a transaction occurs, record the transaction as a journal entry. A journal entry consists of debiting and crediting different accounts. Write the date, the account names and the amount of the transaction. Journal entries must have at least one debit and one credit; however, they can have more than one of each. The rule to keep in mind is that for every journal entry, the total of the amounts debited and credited must be the same.

Record a purchase transaction. When a company purchases an asset, which is anything that has economic value, that asset account increases and either cash decreases or a liability is created. Liabilities are debts owed by a business. To record a transaction that involves a company purchasing $100 of supplies on account, prepare the journal entry by placing a $100 debit to the supplies account and a $100 credit to accounts payable. Accounts payable is a liability account that tracks how much money a company owes to others.

Pay an expense. When a company pays an expense, such as a utility bill, prepare the journal entry by recording the amount of the bill as a debit to utilities expense and as a credit to cash.

Receive cash from a customer. If a customer purchased goods or services from you on credit, the transaction is recorded as a debit to accounts receivable and a credit to a revenue account, such as sales revenue. When the customer pays the bill, record it by debiting the amount to cash and then crediting the accounts receivable account, which reduces the total owed to you from customers.

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