Find out about the five parts to a journal entry and how to decide between debiting or crediting journal entry accounts.
One area of concern for first year accounting students, business students that are only taking accounting because it is a required core class or brand-new bookkeepers is how to prepare journal entries. It is not so much the logistics of presenting the journal entry that causes the most concern but how to figure out which account is debited and which is credited.
Components of a Journal Entry
There are five components to a journal entry:
1. Date: The day on which the account updates are made. For any adjusting journal entries, the date will normally be backdated to the last day of the previous month. Many professional accounting software systems allow the accountant to set up recurring journal entries so in theory a whole year or more of adjusting journal entries could be programmed to post on the last day of each month.
2. Account: This refers to the specific type of asset, liability, revenue, expense or equity account that is being affected by whatever is going on. For example, Cash in Bank is an asset account and Sales is a revenue account.
3. Debit versus Credit: One of the immutable laws of accounting states that assets and expenses are always debited to add to them and credited to subtract from them. Liability, revenue and equity accounts are just the opposite - these accounts are always credited to add to them and always debited to subtract from them. Always, always, always - there is no exception to this rule.
4. Dollar Amount: How much money is changing hands or under the accrual method being accounted for.
5. Description: When writing a description for a journal entry there is a fine line between writing one that is too brief and one that is excessively long. The accountant's goal is to keep the description to the minimum yet be understandable to anyone that might review the journal entry after it has been prepared and posted - for example an external auditor.
Journal Entry Example
On June 5, A retail shop buys $500 of inventory merchandise from ABC Inc.; $100 was paid in cash and $400 of the cost was charged on account.
Here is how the retail shop prepares the journal entry to account for this purchase:
Debit: Merchandise Inventory $500.00
Credit: Cash $100.00
Credit: Accounts Payable $400
Explanation: To record merchandise inventory purchase from ABC Inc.
Journal Entry Standards
In properly written journal entries debits are always shown first. Debits are shown to the left and credits are offset slightly to the right. Finally, debits must equal credits. As shown in this example, total debits of $500 equal total credits ($100 plus $400) $500.
