|An accounting entry is first entered into the accounting journal, also called the general journal.|
The general journal provides a chronological record of transactions that affect the financial statements. An accounting entry into the general journal is called a journal entry.
The Accounting Entry and Accounting Journal Illustrated
To illustrate the process, let’s review how Sunny started his business on January 1, 2010, and record those transactions in the accounting journal.
- Jan. 1 Sunny invested $50,000 into his new business, Sunny Sunglasses Shop.
- Jan. 1 Purchased inventory for $4,500. Paid $3,000 cash, with the balance of $1,500 due in 90 days.
- Jan. 1 Purchased land for $20,000 with $2,000 as a down payment, and a 15 year mortgage for $18,000.
- Jan. 1 Purchased insurance for the year for $2,400.
Sunny Sunglasses Shop
Accounting Entries in the
General Accounting Journal
The Accounting Journal
The first column in the general accounting journal shows the date of the transaction. The second column shows the account debited or credited with a brief explanation. The third column shows a reference to the specific account.
When the accounting entries are posted into the individual general ledger accounts, a reference is made to the account number to indicate that the accounting entries were transferred. These general ledger accounts, called “T-Accounts,” are discussed in the next step in the accounting cycle, posting entries to general ledger.
Finally, the last two columns show the amount of the debit or the credit.
The Accounting Entry and Double Entry Bookkeeping
Each accounting entry made in the accounting journal maintains double entry bookkeeping by keeping the accounting equation in balance.
- The first transaction represents the owner’s investment in the business of $50,000. The investment increases the asset, cash, and owners equity by $50,000. Sunny debits cash because debits increase the asset accounts. He then credits owners equity because credits increase equity and liability accounts. This keeps the accounting equation in balance as follows:
Assets = Liabilities + Owners Equity $50,000 $0 $50,000
- The purchase of inventory represents an increase to an asset account for $4,500. Sunny debits cash because increases in assets are recorded as debits. Sunny used $3,000 in cash to purchase the inventory, so he credits cash since decreases to assets are recorded as credits. Accounts payable, a liability, represents inventory purchased on account. Because increases to liabilities are recorded as credits, Sunny credits the balance owed for $1,500. This accounting entry also keeps the accounting equation in balance:
Assets: Inventory and Cash = Liabilities + Owners Equity $4,500 ($3,000) $1,500 $0
Sunny exchanged $3,000 cash for $3,000 in inventory, and purchased $1,500 more inventory on account. This increased assets and liabilities by $1,500. The transaction did not affect owners equity.
- The third transaction, the purchase of land, increased assets (land) by $20,000, so Sunny debits land for $20,000. Since he used $2,000 in cash as a down payment, he credits the asset account, cash, for the decrease. The mortgage represents a liability. Because increases to liabilities are recorded as credits, Sunny credits the balance owed of $18,000. This accounting entry also keeps the accounting equation in balance:
Assets: Land and Cash = Liabilities + Owners Equity $20,0000 ($2,000) $18,000 $0
Sunny exchanged $2,000 cash for a down payment for the land, and mortgaged the balance for $18,000. This increased assets and liabilities by $18,000. The transaction did not affect owners equity.
- Finally, Sunny purchased insurance for the year. Prepaid insurance is an asset because it represents an insurance policy for one year, which is a future benefit to the company not yet consumed. He debits the asset account, prepaid insurance, and credits cash. This affected only one side of the accounting equation since he exchanged one asset, cash, for another asset, prepaid insurance.
Special Accounting Journals
Sometimes companies use special accounting journals to record accounting entries. This occurs when a company has many transactions of a similar nature. For example, in a purchases journal you can record all debit entries to purchases, and all credit entries to accounts payable. Similarly, in a sales journal you can record all debit entries to accounts receivable, and all credit entries to sales. You can also use separate cash journals to record cash receipts and cash payments.
The most common special accounting journals are listed below.
Special Accounting Journals
|Special Journal||Type of Transaction|
|Cash Receipts||All Cash Receipts|
|Cash Disbursements||All Cash Disbursements|
|Sales||All Sales on Credit|
|Inventory Purchases||Inventory Purchases on Credit|
Accounting entries not included in special accounting journals are recorded in the general accounting journal. No matter which accounting journals accountants use to record accounting entries, that information is then transferred to the general ledger accounts, which is the next step in the accounting cycle.