LESSON #5

HOW JOURNAL ENTRIES WORK?

In day-to-day life T Accounts aren’t that practical to use as they take up lots of space
and it is easy to miss a side of a transaction. We need another, more efficient method for
recording our transactions. Therefore, we use JE or Journal Entries.

WHY IS IT IMPORTANT TO RECORD OUR TRANSACTIONS?

1. Financial reports measure the performance of your business. They tell you whether you are
doing well or badly.

2. Manage your CASH FLOW so you do not run out of it.

3. Keep things organized.

4. Useful at tax time to avoid missing out on any deductions.

5. In case your business gets audited, it is handy to have that paperwork ready. The process of
recording all Financial Transactions is so important that we have a word for it…BOOKKEEPING.
This can be done on any budget, no matter how big your business is.

Since T accounts are tedious to prepare, we use Journal Entries instead. JE is a record of a
financial transaction, and it looks like this.

A. JOURNAL NUMBER. This is a unique reference number that is used to identify the journal.

B. JOURNAL ENTRY DATE. This is the date that the journal is posted in the General Ledger.
It is important because it affects the accounting period where the transaction is going to show
up in.

C. NAMES OF THE ACCOUNTS that are impacted by the journal. Under the heading ‘account’,
you will see the debited one first followed by the credited account (indented). Remember:
Indent the name of the account that is being credited so that it is easier to see. D. We have
separate columns for all the debit and credit entries.

E. A JOURNAL DESCRIPTION is written below the entries. It is a good practice to give a

solid explanation. This will make it much easier to remind yourself why you entered it in the
first place.

Remember, we are talking of DOUBLE-ENTRY Bookkeeping so there must be at least 2 TWO

sides of the journal, the totals of the debit and credit columns should match each other exactly,
because the accounting equation always balances.

EXAMPLE: Window Cleaning Business

The business is up and running for a week now and it is going well but my equipment is getting
all gross and dirty and so I need to get it cleaned. I pay them in cash in order to this. We are
going to need one of those journal templates.
First, we need a unique journal number so we can identify this transaction. We discussed the
first five transactions in the previous video using the T account, so let us call this transaction
number 6. The journal date to be used should be the day the equipment was cleaned. Let us
presume it is September 21 and so the journal entry will appear in the September Accounting
period.

Next, we need the account names that are impacted by this journal. In this case, we are talking
about LAUNDRY COSTS and CASH. Laundry costs are an expense, so DEBITS increase it. $20
was charged so it has to be placed in the debit column. CASH is an Asset, so we have to
CREDIT in order to decrease. We need to indent the account description for cash in order to
help us identify it as credit then put $20 under the credit column.

Finally, we need to give this journal a description. Let us call it: Laundry Costs- Week One.