- Datebook 1 0 6 – Journal Entry Prompts
- Datebook 1 0 6 – Journal Entry Example
- Datebook 1 0 6 – Journal Entry Journal
- Datebook 1 0 6 – Journal Entry Template
What is a Journal Entry?
Journal entries are the first step in the accounting cycle and are used to record all business transactions and events in the accounting system. As business events occur throughout the accounting period, journal entries are recorded in the general journal to show how the event changed in the accounting equation. For example, when the company spends cash to purchase a new vehicle, the cash account is decreased or credited and the vehicle account is increased or debited.
How to Make a Journal Entry
Here are the steps to making an accounting journal entry.
The $2,400 payment was recorded on December 1 with a debit to the income statement account Insurance Expense and a credit to the current asset Cash. Your company prepares monthly financial statements at the end of each calendar month. The following questions pertain to the adjusting entry that should be written by the company. Journal Entries - Easy 1; Quick Multiple Choice Quiz, Test Yourself! Refresh Your Basics in Accounting. Only the Top 10% are able to Score More than 7; Click & See if.
Assume the bonds are retired on January 1, 2020, at a price of 97. (If no entry is required for a transaction/event, select 'No Journal Entry Required' in the first account field.) View transaction list Journal entry worksheet 2 4. Record the issuance of 570 bonds at face value of $1,000 each for $555,042 Note: Enter debits before credits. Journal entry created automatically from posting a journal voucher: displays name of person who posted the journal voucher, using the format defined in the employee master data. Note The journal entry creator and approver use the employee name that is matched to the user at the time when the journal entry is created.
1. Identify Transactions
There are generally three steps to making a journal entry. First, the business transaction has to be identified. Obviously, if you don’t know a transaction occurred, you can’t record one. Using our vehicle example above, you must identify what transaction took place. In this case, the company purchased a vehicle. This means a new asset must be added to the accounting equation.
2. Analyze Transactions
After an event is identified to have an economic impact on the accounting equation, the business event must be analyzed to see how the transaction changed the accounting equation. When the company purchased the vehicle, it spent cash and received a vehicle. Both of these accounts are asset accounts, so the overall accounting equation didn’t change. Total assets increased and decreased by the same amount, but an economic transaction still took place because the cash was essentially transferred into a vehicle.
3. Journalizing Transactions
After the business event is identified and analyzed, it can be recorded. Journal entries use debits and credits to record the changes of the accounting equation in the general journal. Traditional journal entry format dictates that debited accounts are listed before credited accounts. Each journal entry is also accompanied by the transaction date, title, and description of the event. Here is an example of how the vehicle purchase would be recorded.
Since there are so many different types of business transactions, accountants usually categorize them and record them in separate journal to help keep track of business events. For instance, cash was used to purchase this vehicle, so this transaction would most likely be recorded in the cash disbursements journal. There are numerous other journals like the sales journal, purchases journal, and accounts receivable journal.
Example
We are following Paul around for the first year as he starts his guitar store called Paul’s Guitar Shop, Inc. Here are the events that take place.
Entry #1 — Paul forms the corporation by purchasing 10,000 shares of $1 par stock.
Entry #2 — Paul finds a nice retail storefront in the local mall and signs a lease for $500 a month.
Entry #3 — PGS takes out a bank loan to renovate the new store location for $100,000 and agrees to pay $1,000 a month. He spends all of the money on improving and updating the store’s fixtures and looks.
Entry #4 — PGS purchases $50,000 worth of inventory to sell to customers on account with its vendors. He agrees to pay $1,000 a month.
Entry #5 — PGS’s first rent payment is due.
Entry #6 — PGS has a grand opening and makes it first sale. It sells a guitar for $500 that cost $100.
Entry #7 — PGS sells another guitar to a customer on account for $300. The cost of this guitar was $100.
Entry #8 — PGS pays electric bill for $200.
Entry #9 — PGS purchases supplies to use around the store.
Entry #10 — Paul is getting so busy that he decides to hire an employee for $500 a week. Pay makes his first payroll payment.
Entry #11 — PGS’s first vendor inventory payment is due of $1,000.
Entry #12 — Paul starts giving guitar lessons and receives $2,000 in lesson income.
Entry #13 — PGS’s first bank loan payment is due.
Entry #14 — PGS has more cash sales of $25,000 with cost of goods of $10,000.
Entry #15 — In lieu of paying himself, Paul decides to declare a $1,000 dividend for the year.
Now that these transactions are recorded in their journals, they must be posted to the T-accounts or ledger accounts in the next step of the accounting cycle.
Here is an additional list of the most common business transactions and the journal entry examples to go with them.
Common Journal Entry Questions
What is a manual Journal Entry?
Manual journal entries were used before modern, computerized accounting systems were invented. The entries above would be manually written in a journal throughout the year as business transactions occurred. These entries would then be totaled at the end of the period and transferred to the ledger. Today, accounting systems do this automatically with computer systems.
What is a general journal entry in accounting?
An accounting journal entry is the written record of a business transaction in a double entry accounting system. Every entry contains an equal debit and credit along with the names of the accounts, description of the transaction, and date of the business event.
What is the purpose of a journal and ledger?
The purpose of an accounting journal is record business transactions and keep a record of all the company’s financial events that take place during the year. An accounting ledger, on the other hand, is a listing of all accounts in the accounting system along with their balances.
What is the purpose of a journal entry?
A journal entry records financial transactions that a business engages in throughout the accounting period. These entries are initially used to create ledgers and trial balances. Eventually, they are used to create a full set of financial statements of the company.
Contents
- 2 How to Make a Journal Entry
Let’s review our accounting cycle again. We have completed the first two columns and now we have the final column which represents the closing (or archive) process.
Accounting Cycle | ||
1. Analyze Transactions | 5. Prepare Adjusting Journal Entries | 9. Prepare Closing Entries |
2. Prepare Journal Entries | 6. Post Adjusting Journal Entries | 10. Post Closing Entries |
3. Post journal Entries | 7. Prepare Adjusted Trial Balance | 11. Prepare Post-Closing Trial Balance |
4. Prepare Unadjusted Trial Balance | 8. Prepare Financial Statements |
Accounts are two different groups:
- Permanent – balance sheet accounts including assets, liabilities, and most equity accounts. These account balances roll over into the next period. So, the ending balance of this period will be the beginning balance for next period.
- Temporary – revenues, expenses, dividends (or withdrawals) account. These account balances do not roll over into the next period after closing. The closing process reduces revenue, expense, and dividends account balances (temporary accounts) to zero so they are ready to receive data for the next accounting period.
Accountants may perform the closing process monthly or annually. The closing entries are the journal entry form of the Statement of Retained Earnings. The goal is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts.
Remember how at the beginning of the course we learned that net income is added to equity. This is the process to make that happen! Taskpaper – plain text to dos 3 8 5.
The following video summarizes how to prepare closing entries.
Viscosity 1 4 2 – graphical user interface for openvpn. In accounting, we often refer to the process of closing as closing the books. Only revenue, expense, and dividend accounts are closed—not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are:
- Closing the revenue accounts—transferring the credit balances in the revenue accounts to a clearing account called Income Summary.
- Closing the expense accounts—transferring the debit balances in the expense accounts to a clearing account called Income Summary.
- Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account.
- Closing the Dividends account—transferring the debit balance of the Dividends account to the Retained Earnings account.
Let’s review what we know about these accounts:
Increase with | Decrease with | |
Revenue | Credit | Debit |
Expense | Debit | Credit |
Dividends | Debit | Credit |
If we want to make the account balance zero, we will decrease the account. We use a new temporary closing account called income summary to store the closing items until we get close income summary into Retained Earnings. To close means to make the balance zero. We will look at the following information for MicroTrain from the adjusted trial balance:
Datebook 1 0 6 – Journal Entry Prompts
Debit | Credit |
Retained Earnings | $ 6,100 |
Service Revenue | 36,500 |
Interest Revenue | 600 |
Salaries Expense | 18,360 |
Rent Expense | 1,200 |
Utilities Expense | 500 |
Insurance Expense | 200 |
Supplies Expense | 7,000 |
Depreciation Expense | 750 |
Notice how the retained earnings balance is $6,100? On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts.
Step 1: Close Revenue accounts
Close means to make the balance zero. We see from the adjusted trial balance that our revenue accounts have a credit balance. To make them zero we want to decrease the balance or do the opposite. We will debit the revenue accounts and credit the Income Summary account. The credit to income summary should equal the total revenue from the income statement.
Debit | Credit |
Service Revenue | 36,500 |
Interest Revenue | 600 |
Income Summary | 37,100 |
Step 2: Close Expense accounts
The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts. Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary. The total debit to income summary should match total expenses from the income statement.
Debit | Credit |
Income Summary | 28,010 |
Salaries Expense | 18,360 |
Rent Expense | 1,200 |
Utilities Expense | 500 |
Insurance Expense | 200 |
Supplies Expense | 7,000 |
Depreciation Expense | 750 |
Step 3: Close Income Summary account
At this point, you have closed the revenue and expense accounts into income summary. The balance in income summary now represents $37,100 credit – $28,010 debit or $9,090 credit balance…does that number seem familiar? It should — income summary should match net income from the income statement. We want to remove this credit balance by debiting income summary. What did we do with net income? We added it to retained earnings in the statement of retained earnings. How do we increase an equity account in a journal entry? We credit!
Debit | Credit |
Income Summary (37,100 – 28,010) | 9,090 |
Retained Earnings | 9,090 |
If expenses were greater than revenue, we would have net loss. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary.
Datebook 1 0 6 – Journal Entry Example
Step 4: Close Dividends (or withdrawals) account
After we add net income (or subtract net loss) on the statement of retained earnings, what do we do next? We subtract any dividends to get the ending retained earnings. This will be the journal entry form of doing this calculation but be careful because you do not want to use the amount of retained earnings but DIVIDENDS. We want to decrease retained earnings (debit) and remove the balance in dividends (credit) for the amount of the dividends. MicroTrain did not pay dividends this year but the entry would appear as:
Debit | Credit |
Retained Earnings | Div Amt |
Dividends | Div Amt |
Div Amt means we will use the DIVIDEND amount and not the balance in retained earnings.
Datebook 1 0 6 – Journal Entry Journal
Anytime we complete journal entries, we always need to post to the same ledger cards or T-accounts we have been using all along. When we post, we do not change anything from the journal entries — we debit (left side) where we did in the entries and credit (right side) wherever we did in the entries. The ledger card for income summary and retained earnings would look like this:
Account: Income Summary | Debit | Credit | Balance |
(1) Close Revenues | 37,100 | 37,100 | |
(2) Close Expenses | 28,010 | 9,090 | |
(3) Close Income Summary | 9,090 | 0 |
Account: Retained Earnings | Debit | Credit | Balance |
Beginning Balance | 6,100 | ||
(3) Close Income Summary | 9,090 | 15,190 | |
(4) Close Dividends | 0 | 15,190 |
The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance. The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings. We do not need to show accounts with zero balances on the trial balances.
MicroTrain’s post closing trial balance would be:
Debit | Credit | |
Cash | 10,000 | |
Accounts Receivable | 25,000 | |
Interest Receivable | 600 | |
Supplies | 1,500 | |
Prepaid Insurance | 2,200 | |
Trucks | 40,000 | |
Accum. Depreciation-Trucks | 750 | |
Accounts Payable | 25,000 | |
Unearned Revenue | 3,000 | |
Salaries Payable | 360 | |
Common Stock | 35,000 | |
Retained Earnings | 15,190 | |
TOTALS | 79,300 | 79,300 |
Datebook 1 0 6 – Journal Entry Template
Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet.
Congratulations! You made it through the complete accounting cycle.
Answer the following questions on closing entries and rate your confidence to check your answer.