Tag Archives | double entry bookkeeping

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


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Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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Journal Entries

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Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

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Debit vs Credit

See Also:
Debits and Credits
Double Entry Bookkeeping

Debits and Credits in Accounting

When people discuss debit vs credit, they are usually referring to double entry accounting. More specifically, a debit and credit are recorded for each transaction. These two are required for each transaction in order to keep the accounting equation in balance. There is more information about this in the next section.

Today’s accounting software is also based off of the debit and credit account ledgers. In fact, these programs also offer mobile applications to manage your business’s finances on the go. Even if new software reduces the need to understand debits and credits, it is still essential for business owners and managers to be comfortable with. For example, if one has to record an unusual transaction or correct a mistake, it is often necessary that he or she understands double entry bookkeeping.

What is Double Entry Bookkeeping?

Double entry bookkeeping is a method of recording business transactions using at least two accounts for each transaction. Each account receives a debit on the left side or a credit on the right side. Together, the debits and credits keep assets equal to liabilities plus shareholders’ equity. For example, imagine Business A purchases equipment using cash from Business B. Business A would record a debit to equipment, to increase this asset account, and a credit to cash, to decrease this asset account. Business B would record two transactions: a debit to cash and a credit to revenues, as well as a debit to COGS and a credit to Inventory.

The rules are not quite intuitive. They say to increase assets and expenses with debits and decrease with credits. On the other hand, increase liabilities and revenue with credits and decrease with debits. It takes memorization and commitment to learn these rules, but it pays off by having a better grasp of a company’s books.

Debits and Credits for a Bank

One reason people have such a difficult time learning the difference of debit vs credit is their experience with bank accounts. When a business deposits money into a bank, it credits its account. Conversely, if you have a recurring charge, debit the account to decrease its amount. This is the opposite of the rules stated above for double entry accounting. Why are the bank’s debits and credits confusing? Banks are in the business of lending money. This means that a client’s deposit is a liability on their books; thus, it increases with a credit.

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Debit vs Credit

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Debit vs Credit

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Debits and Credits

See Also:
Accounting Asset Definition
Accounting For Factored Receivables
Financial Accounting Standards Board (FASB)
Imprest Account
Accounting Fraud Prevention using QuickBooks
Accounting Income vs. Economic Income

Debits and Credits Definition

Debits and credits, defined as the double recorded method which is the centerpiece of accounting, are used by accountants across the world. The benefit to using debits and credits, is that they provide double redundant record keeping for expenditures; money is both added and subtracted. This creates 2 places for expenses on financial records, thus preventing issues from improper recording.

Debits and Credits Explanation

Debits and credits, explained as the error-proof method for accounting, allow accountants to have twice the recordsDebits and credits basics exist as such: there is a debit and credit account for each of the journal entries. Debit accounts is where money is taken from the company. Whereas credit accounts is where money is added to a business.


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Debits and Credits History

Debits and credits accounts were formally invented in the 15th century by Luca Pacioli, as an official system to specify what was already used by merchants in Venice. These formal roots trace as far back as the Roman empire. There a side for a creditor and a side for a debtor existed. They used this system in the Middle East, Florence, and the Mediici bank. They finally found a home in Venice.

Debits and Credits Rules

In either of these, a debit or credit can occur. If a debit occurs in a debit account, then the company loses money. If a debit occurs in a credit account, then money is taken from a company to be later added to another company credit account. To make the double entry work with this contra accounts were created: accounts which exist merely to balance the effect happening in another account. This is how debits and credits double entry can occur. It may seem confusing to the average person, but accountants love that this method is redundant. It lends to pristine recording, which you can check in multiple places.

Debits and Credits in Bookkeeping

Any respectable accountants uses the double entry bookkeeping method. For example, debits and credits in quickbooks allow the system to make sense to the accountant as well as the untrained record-keeper. Through software like Quickbooks, this method has become readily available and useful for everyone.

Example

For example, Steven is a part time bookkeeper for a small boutique in a strip mall near his house. He shows up to keep records for the company owners, who are too busy with the operations of their business. Quickbooks is Steven’s best friend when he is in the office.

But Steven never understood how credits and debits work. Then, one day, the company accountant visited the office. He was able to pick her brain. The experience was quite enlightening.

The accountant told Steven about how double entry bookkeeping works. By showing t accounts debits and credits examples he finally understood. This eventually proved useful.

One day, Steven overheard the owners express how their financial records had an error. After listening, he was able to look at the records. He took his knowledge of accounting, recently learned, to move an unnamed expense in the software. This corrected the problem, and the owners even gave Steven a bonus.

Understanding credits and debits in accounting has greatly helped Steven. After his experiences, he decided to become an accountant. And he will work closely with these records for the rest of his life.

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debits and credits

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debits and credits

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