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Accounting Journal Entries

Accounting Study Guide

U.S. GA A P IFRS, IA S
Accounting Topics

Journal Entries in Accounting

Examples of Journal Entries A djusting Journal Entries What is a journal entry in A ccounting?

Journal e ntry is a n e ntry to the journal. Journal is a re cord tha t k e e ps accounting tra nsa ctions in chronological orde r, i.e . a s the y occur. Le dge r is a re cord tha t k e e ps accounting tra nsa ctions by a ccounts. Account is a unit to re cord and sum m arize a ccounting transactions. All a ccounting transactions a re re corde d through journal e ntrie s tha t show a ccount nam e s, a m ounts, and whe the r those accounts are re corde d in de bit or cre dit side of a ccounts.

Double-Entry A ccounting

To re cord transactions, a ccounting syste m use s double -e ntry a ccounting. Double -e ntry im plie s tha t transactions a re a lways re corde d using two side s, de bit and cre dit. De bit re fe rs to the le ft-hand side and cre dit re fe rs to the right-ha nd side of the journal e ntry or a ccount. The sum of de bit side a m ounts should e qual to the sum of cre dit side a m ounts. A journa l e ntry is ca lle d "balance d" whe n the sum of de bit side am ounts e quals to the sum of cre dit side a m ounts.

T-A ccount

This form look s lik e a le tte r "T", so it is calle d a T-account. T-account is a conve nie nt form to a na lyze accounts, be cause it shows both de bit and cre dit side s of the a ccount. A ccount Debit Credit

Examples of Journal Entries

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Accounting Journal Entries

Tra nsa ction 1: C om pa ny A sold its products a t $120 and re ce ive d the full am ount in cash. Ste ps 1 2 Se lf-Q ue stions W ha t did C om pany A re ce ive ? If C om pa ny A re ce ive d ca sh, how would this a ffe ct the ca sh balance ? C a sh. R e ce iving ca sh incre a se s the cash ba la nce of the com pany. De bit side (Le ft side ). Sale s. C re dit side (R ight side ). Ye s. $120 = $120 Answe rs

3 4 5 6

W hich side of ca sh a ccount re pre se nts the incre ase in ca sh? W ha t is the a ccount nam e to re cord the sale s of products. W hich side of sale s a ccount re pre se nts the incre ase in sale s? Doe s the sum of de bit side a m ounts e qua l to the sum of cre dit side a m ounts? In othe r words, doe s this journa l e ntry balance ?

[Journal entry to record transaction 1]

De bit C ash Sa le s 120

C re dit

120

Examples of Journal Entries

Tra nsa ction 2: C om pa ny A purchase d supplie s a nd pa id $50 in cash. Ste ps 1 2 Se lf-Q ue stions W ha t did C om pany A re ce ive ? If C om pa ny A re ce ive d supplie s, how would this affe ct the supplie s balance ? W hich side of supplie s account re pre se nts the incre a se in cash? W ha t did C om pany A pay? W hich side of ca sh a ccount re pre se nts the de cre ase in ca sh? Doe s the sum of de bit side a m ounts equa l to the sum of cre dit side Supplie s. It incre ase s supplie s ba la nce . Answe rs

3 4 5 6

De bit side (Le ft side ). C a sh. C re dit side (R ight side ). Ye s.

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Accounting Journal Entries

a m ounts? In othe r words, doe s this journa l e ntry balance ? $50 = $50

[Journal e ntry to re cord tra nsa ction 2] De bit Supplie s C ash 50 50 C re dit

Debits and Credits of A ccounts

De bit Incre a se in a sse t a ccounts Incre ase in e x pe nse accounts

C re dit De cre ase in asse t accounts De cre a se in e x pe nse a ccounts

De cre ase in liability a ccounts De cre a se in e quity a ccounts De cre a se in re ve nue accounts

Incre ase in liability a ccounts Incre a se in e quity a ccounts Incre a se in re ve nue accounts

Normal Balances of A ccounts

Accounts ha ve norm al ba la nce s on the side whe re the incre ase s in such a ccounts a re re corde d. Asse t accounts ha ve norm al ba la nce s on de bit side . Ex pe nse a ccounts have norm a l balance s on de bit side . Lia bility accounts ha ve norm al ba la nce s on cre dit side . Equity a ccounts have norm a l balance s on cre dit side . R e ve nue a ccounts have norm a l balance s on cre dit side . O n the financial state m e nts, a ccounts a re re porte d on the side s whe re the y have norm a l balance s. Lia bility accounts ha ve norm al ba la nce s on cre dit side . Equity a ccounts have norm a l balance s on cre dit side .

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Asse ts

Accounting Journal Entries

Balance She e t Liabilitie s O wne rs' Equity

Incom e State m e nt Ex pe nse s R e ve nue s

Read Journals Online Full-text journals for academic research at Questia Online Library.
www.Q ue stia .com /Journals

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Adjusting Journal Entries

Accounting Study Guide

U.S. GA A P IFRS, IA S
Accounting Topics

Adjusting Journal Entries

Basics of Journal Entries What is an adjusting journal entry? Adjusting journa l e ntry is a journa l e ntry prepare d to adjust account ba la nces. The only wa y of cha nging a ccount balance s is to m a k e journal e ntrie s. Account ba la nce s cannot be change d without journal e ntrie s. If curre nt a ccount balance s do not re pre se nt corre ct a m ounts, journal e ntrie s are ne e de d to cha nge curre nt balance s to the corre ct ba la nce s. --> Journa l e ntrie s pre pare d with this purpose a re adjusting journal entries. Why do companies need adjusting journal entries? C urre nt a ccount balance s m a y not re pre se nt corre ct balance s due to following re a sons: a . C om pa ny m ade m ista k e s in pre pa ring journa l e ntrie s in the past. b. Accounting re cords a re not update d to re fle ct ne w tra nsa ctions or a m ount change s in pre vious tra nsa ctions. Adjusting journa l e ntrie s a re usua lly pre pa re d at the e nd of a n a ccounting pe riod to upda te a ccount balance s to re fle ct corre ct balance s as of the ba la nce she e t da te (the da te a t the e nd of an accounting pe riod). The tim ing diffe re nce s in re cognizing re ve nue s a nd e x pe nse s be twe e n accrual ba sis a nd ca sh basis accounting a re fre que ntly corre cte d by adjusting journa l e ntrie s. Three steps of preparing adjusting journal entries Ste p 1: Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod. Ste p 2: Ide ntify the corre ct account ba la nce s. Ste p 3: Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l e ntrie s to adjust such diffe re nce s. Example 1 C om pa ny A sold its products a t the price of $1,000 for cash. Howe ve r, this transaction was re corde d a s $100 sale s. W ha t is the a djusting journal e ntry to corre ct this m ista k e ?

Ste p 1

Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod. De bit C a sh Sale s 100 100 C re dit

Ste p 2 C ash Sa le s Ste p 3

Ide ntify the corre ct account ba la nce s. 1,000 1,000 (De bit Balance ) (C re dit Balance )

Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l e ntrie s to adjust such diffe re nce s. C orre ct 1,000 1,000 C urre nt 100 100 C orre ct - C urre nt 900 900

Accounts C a sh Sa le s

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Adjusting Journal Entries

To a djust the se diffe re nce s, following a djusting journal e ntry is ne e de d. De bit C a sh Sale s 900 900 C re dit

Example 2 O n De ce m be r 1, 2006 C om pany A signe d an insura nce contract and paid $3,000 ca sh a s insura nce pre m ium for thre e m onths. C om pa ny re corde d $3,000 as pre paid insurance on De ce m be r 1, 2006. P re pare adjusting journa l e ntrie s a t De ce m be r 31, 2006.

Ste p 1

Ide ntify the origina l journa l e ntrie s that have be e n m a de during the pe riod. De bit Pre pa id insura nce C a sh 3,000 3,000 C re dit

Ste p 2

Ide ntify the corre ct account ba la nce s.

O n De ce m ber 31, 2006, $1,000 insura nce prem ium should be re cognized as an e x pe nse for De ce m be r. Insura nce e x pe nse Pre pa id insura nce Insurance e x pe nse for 1999 = $3,000 x 1/3 = $1,000 1,000 2,000 (De bit Ba la nce ) (De bit Ba la nce )

Ste p 3

Ana lyze the diffe re nce s be twe e n corre ct a nd curre nt ba la nce s a nd pre pa re journa l e ntrie s to adjust such diffe re nce s. Accounts Insura nce e x pe nse Pre pa id insura nce C orre ct 1,000 2,000 C urre nt 0 3,000 C orre ct - C urre nt 1,000 (1,000)

To a djust the se diffe re nce s, following a djusting journal e ntry is ne e de d. De bit Insurance e x pe nse P re paid insurance 1,000 1,000 C re dit

C re dit side of pre pa id insura nce (an asse t account) re pre se nts a de cre a se .

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Accounting Journal Entries

Accounting Study Guide

U.S. GA A P IFRS, IA S
Accounting Topics

Examples of Journal Entries

Basics of Journal Entries Example 1: Financing A ctivities Owner invested $10,000 in the company. A nalysis of Transaction Ste ps 1 Incre a se in Asse ts (C ash) by $10,000 2 Incre a se in O wne r's Equity by $10,000 Journal Entry C a sh O wne r's Equity Description of Journal Entry O wne r inve ste d $10,000 in the com pany. Results of Journal Entry C a sh balance incre ase s by $10,000. --> Incre a se in Asse ts O wne r's Equity balance incre ase s by $10,000. --> Incre a se in O wne r's Equity De bit 10,000 C re dit 10,000 De bit or C re dit ? De bit C re dit

Example 2: Financing A ctivities The company borrowed $20,000 from a bank. A nalysis of Transaction Ste ps 1 Incre a se in Asse ts (C ash) by $20,000 2 Incre a se in Liabilitie s (Borrowings) by $20,000 Journal Entry C a sh Borrowings De bit 20,000 C re dit 20,000 De bit or C re dit ? De bit C re dit

Description of Journal Entry Borrowe d $20,000. Results of Journal Entry C a sh balance incre ase s by $20,000. --> Incre a se in Asse ts Borrowings ba la nce incre a se s by $10,000. --> Incre ase in Lia bilitie s

Example 3: Investing A ctivities The company purchased $12,000 equipment and paid in cash. A nalysis of Transaction Ste ps 1 Incre a se in Asse ts (Equipm e nt) by $12,000 2 De cre ase in Asse ts (C a sh) by $12,000 Journal Entry
Equipment

De bit or C re dit ? De bit C re dit De bit 12,000 C re dit 12,000

C a sh

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Description of Journal Entry P urcha se d $12,000 e quipm e nt in ca sh.

Accounting Journal Entries

Results of Journal Entry Equipm e nt ba la nce incre a se s by $12,000. --> Incre ase in Asse ts C a sh balance de cre ase s by $12,000. --> De cre ase in Asse ts

Example 4: Operating A ctivities The company purchased $6,000 merchandise (600 units) on credit. A nalysis of Transaction Ste ps 1 Incre a se in Asse ts (Me rchandise ) by $6,000 2 Incre a se in Liabilitie s (Accounts Pa yable ) by $6,000 Journal Entry
Merchandise

De bit or C re dit ? De bit C re dit C re dit 6,000

Accounts P aya ble Description of Journal Entry P urcha se d $6,000 m e rcha ndise on cre dit.

De bit 6,000

Results of Journal Entry Me rcha ndise ba la nce incre a se s by $6,000. --> Incre a se in Asse ts Accounts P aya ble balance incre ase s by $6,000. --> Incre ase in Lia bilitie s

Example 5: Operating A ctivities The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of sale. A nalysis of Transaction Note: This transaction includes both "REVENUE" and "EXPENSE" components. (1) REVENUE side Ste ps 1 Incre a se in Asse ts (C ash) by $9,000 2 Incre a se in Asse ts (Accounts R e ce ivable ) by $2,000 3 Incre a se in R e ve nue (Sa le s) by $11,000 (2) EXPENSE side Ste ps 1 Incre a se in Ex pe nse s (C ost of Me rcha ndise Sold) by $5,000 ($6,000 / 600 units = $10 pe r unit) ($10 pe r unit X 500 units sold = $5,000 cost) 2 De cre ase in Asse ts (Me rcha ndise ) by $5,000 (1) REVENUE Journal Entry De bit or C re dit ? De bit De bit C re dit De bit or C re dit ? De bit De bit

De bit C re dit C a sh 9,000 Accounts R e ce iva ble 9,000 Sale s R e ve nue 11,000 Description of Journal Entry Sold m e rcha ndise at $11,000 price a nd re ce ive d $9,000 in cash. Results of Journal Entry C a sh balance incre ase s by $9,000. --> Incre ase in Asse ts Accounts R e ce iva ble balance incre ase s by $2,000. --> Incre ase in Asse ts Sale s R e ve nue account ba la nce incre a se s by $11,000. --> Incre ase in R e ve nue (2) EXPENSE Journal Entry C ost of Me rcha ndise Sold Me rcha ndise Description of Journal Entry To re cord the cost of m e rchandise sold. De bit 5,000 C re dit 5,000

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Accounting Journal Entries

Results of Journal Entry Me rcha ndise ba la nce de cre a se s by $5,000. --> De cre ase in Asse ts C ost of Me rcha ndise Sold account ba la nce incre a se s by $5,000. --> Incre a se in Ex pe nse

Example 6: Operating A ctivities The company paid $3,500 salaries. A nalysis of Transaction Ste ps 1 Incre a se in Ex pe nse s (Salarie s Ex pe nse ) by $3,500 2 De cre ase in Asse ts (C a sh) by $3,500 Journal Entry Salarie s Ex pe nse C a sh Description of Journal Entry P aid $3,500 salarie s. Results of Journal Entry C a sh balance de cre ase s by $3,500. --> De cre a se in Asse ts Salaries Ex pe nse account ba la nce increase s by $3,500. --> Increase in Ex pe nse s De bit 3,500 C re dit 3,500 De bit or C re dit ? De bit C re dit

Example 7: Operating A ctivities The company paid $1,500 rent. A nalysis of Transaction Ste ps 1 Incre a se in Ex pe nse s (R e nt Ex pe nse ) by $1,500 2 De cre ase in Asse ts (C a sh) by $1,500 Journal Entry R e nt Ex pe nse C a sh Description of Journal Entry P aid $1,500 re nt. Results of Journal Entry C a sh balance de cre ase s by $1,500. --> De cre a se in Asse ts R e nt Ex pe nse account ba la nce incre a se s by $1,500. --> Incre a se in Ex pe nse s Further analysis of these transactions continues on the next file. De bit 1,500 C re dit 1,500 De bit or C re dit ? De bit C re dit

Full-Text Online Journals Full-text journals for academic research at Questia Online Library.
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Accrual Basis Accounting

Accounting Study Guide

U.S. GA A P IFRS, IA S
Accounting Topics

Accrual Basis vs. Cash Basis Accounting

U.S. GAAP by Topic Financial Sta te m e nts Accounting for Inve ntorie s De pre cia tion Me thods Accounting Journa l Entrie s A ccrual Basis A ccounting Unde r the a ccrua l basis accounting, re ve nue s and e x pe nse s a re re cognize d a s follows: R e ve nue re cognition: R e ve nue is re cognize d whe n both of the following conditions a re m e t: a . R e ve nue is e a rne d. b. R e ve nue is re a lize d or re aliza ble . R e ve nue is e a rne d whe n products are de live re d or se rvice s are provide d. R e alize d m e a ns cash is re ce ive d. R e aliza ble m e a ns it is re asona ble to e x pe ct that cash will be re ce ive d in the future . Ex pe nse re cognition: Ex pe nse is re cognize d in the pe riod in which re la te d re ve nue is re cognize d (Matching Principle). Cash Basis A ccounting Unde r the ca sh basis accounting, re ve nue s and e x pe nse s a re re cognize d a s follows: R e ve nue re cognition: R e ve nue is re cognize d whe n cash is re ce ive d. Ex pe nse re cognition: Ex pe nse is re cognize d whe n cash is paid. Timing differences in recognizing revenues and expenses The re a re pote ntial tim ing diffe re nce s in re cognizing re ve nue s and e x pe nse s be twe e n a ccrua l basis and cash ba sis a ccounting. Four types of timing differences a. b. c. d. A ccrued Revenue: R e ve nue is re cognize d before cash is re ce ive d. A ccrued Expense: Ex pe nse is re cognize d before cash is paid. Deferred Revenue: R e ve nue is re cognize d after ca sh is re ce ive d. Deferred Expense: Ex pe nse is re cognize d after cash is paid.

A n Example of A ccrued Revenue Ex am ple : Products a re sold at $5,000 on Ma y 1, 2006 a nd ca sh is re ce ive d on Ma y 10, 2006. May 1, 2006 R e ve nue is re cognize d. Ma y 10, 2006 C a sh is re ce ive d.

[Journal e ntry on Ma y 1, 2006] De bit Accounts re ce iva ble Sale s [Journal e ntry on Ma y 10, 2006] De bit C a sh 5,000 C re dit 5,000 5,000 C re dit

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Accounts re ce iva ble

Accrual Basis Accounting

5,000

A n Example of A ccrued Expense Ex am ple : O n Ma y 1, 2006, C om pany A borrowe d $100,000 from a bank a nd prom ise d to pay 12% inte re st at the e nd of e ach qua rte r. May 31, 2006 Inte re st e x pe nse is re cognize d for Ma y. June 30, 2006 C a sh is pa id at the e nd of the qua rte r.

[Journal e ntry on Ma y 1, 2006] De bit C a sh Borrowings from ba nk [Journal e ntry on Ma y 31, 2006] De bit Inte re st e x pe nse Inte re st paya ble $100,000 x 12% x 1/12 = $1,000 for e ach m onth. Inte re st paya ble is a lia bility account. C re dit side of inte re st pa yable (a liability a ccount) re pre se nts a n incre a se . [Journal e ntry on June 30, 2006] De bit Inte re st e x pe nse Inte re st paya ble C re dit side of inte re st pa yable (a liability a ccount) re pre se nts a n incre a se . De bit Inte re st paya ble C a sh C om pany pa ys $2,000 a s inte re sts for May a nd June . De bit side of inte re st pa yable (a liability a ccount) re pre se nts a de cre ase . A n Example of Deferred Revenue Ex am ple : O n Ma y 1, 2006, C om pany A had a ne w le ase contra ct with a te na nt a nd re ce ive d $6,000 for two m onth re nt. Ma y 1, 2006 C a sh is re ce ive d. May 31 a nd June 30 2006 R e ve nue is re cognize d at the e nd of May a nd June . 2,000 2,000 C re dit 1,000 1,000 C re dit 1,000 1,000 C re dit 100,000 100,000 C re dit

R e ve nue is re cognize d whe n C om pany A provide s se rvice . In this e x am ple , se rvice is provide d whe n tim e passe s.

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[Journal e ntry on Ma y 1, 2006]

Accrual Basis Accounting

De bit C a sh Une a rne d re nt re ve nue 3,000

C re dit

3,000

Une a rne d re nt re ve nue is a liability a ccount. C re dit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a n incre a se . "Une arne d re ve nue" accounts re prese nt the am ount of cash re ce ived be fore se rvice s are provided. Since se rvices have not be e n provide d ye t, it is not re ve nue . "Une arne d re ve nue" accounts are liabilitie s of the com pany, be ca use the y should be paid back to the othe r party if se rvice is not provide d in the future . [Journal e ntry on Ma y 31, 2006] De bit Une a rne d re nt re ve nue R e nt re ve nue 3,000 3,000 C re dit

De bit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a de cre ase . C re dit side of re nt re ve nue (a re ve nue account) re pre se nts an incre ase . [Journal e ntry on June 30, 2006] De bit Une a rne d re nt re ve nue R e nt re ve nue 3,000 3,000 C re dit

De bit side of une a rne d re nt re ve nue (a liability a ccount) re pre se nts a de cre ase . C re dit side of re nt re ve nue (a re ve nue account) re pre se nts an incre ase . A n Example of Deferred Expense Ex am ple : C om pa ny A purchase d a n insurance for a pe riod from May 1, 2006 to July 31, 2006 and paid $6,000 ca sh for thre e m onth insura nce pre m ium . Ma y 1, 2006 C ash is paid. May 31, June 30, July 31, 2006 Ex pe nse is re cognize d at the e nd of May, June a nd July.

[Journal e ntry on Ma y 1, 2006] De bit P re paid insurance C a sh P re paid insurance is a n a sse t a ccount. De bit side of pre pa id insura nce (an asse t account) re pre se nts an incre ase . [Journal e ntry on Ma y 31, 2006] De bit Insurance e x pe nse 2,000 C re dit 6,000 6,000 C re dit

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P re paid insurance

Accrual Basis Accounting

2,000

C re dit side of pre pa id insura nce (an asse t account) re pre se nts a de cre a se . [Journal e ntry on June 30, 2006] De bit Insurance e x pe nse P re paid insurance C re dit side of pre pa id insura nce (an asse t account) re pre se nts a de cre a se . [Journal e ntry on July 31, 2006] De bit Insurance e x pe nse P re paid insurance C re dit side of pre pa id insura nce (an asse t account) re pre se nts a de cre a se . 2,000 2,000 C re dit 2,000 2,000 C re dit

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