an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease asset and expense accounts
Consider our example for the yoga studio. How would we record journal entries for each transaction? Pre-openingPrior to opening the business, you make the following transactions:1. You contribute $4,000 in cash to start the business.Cash 4,000 Contributed capital 4,0002. You purchase $500 worth of mats and other equipment for use during classes.PPE 500 Cash 5003. You purchase an additional $400 worth of mats, equipment, and clothing for sale at the studio.Inventory 400 Cash 4004. You purchase liability insurance at a total cost of $1,200. The policy covers July 1 through December31.Prepaid insurance 1,200 Cash 1,200JulyThe following transactions take place during July.1. You receive cash totaling $800 for classes.Cash 800 Revenue 8002. Your instructor teaches classes for the month. You agree to pay $600 for the classes; $300 is paid on July 15, and $300 will be paid on August 3.Wage expense 600 Cash 300 Wage payable 3003. You pay rent for July of $1,000 on July 1.Rent expense 1,000 Cash 1,0004. You use utilities (electricity and water) totaling $200. This amount is payable on August 15.Utility expense 200 Utility payable 200AugustThe following transactions take place during August.1. You receive $1,500 in cash for classes. Of this amount, $1,000 was for classes in August. The remainder is for 2-month passes allowing unlimited classes in August and September.Cash 1,500 Revenue 1,250 Unearned revenue 2502. Your instructor again earns $600 teaching classes; $300 due on August 16 and $300 on September 1.Wage expense 600 Cash 300 Wage payable 3003. Utilities total $150, payable September 15.Utility expense 150 Utility payable 1504. You pay rent of $1,000 on August 1.Rent expense 1,000 Cash 1,0005. You sell inventory costing $150 for a $225.Cash 225 Revenue 225Cost of goods sold 150 Inventory 150(these can be combined into a single entry if you choose.)6. You are worried about money, so your Uncle Rafael makes you an offer. He agrees to loan you $2,000 in cash. You will need to repay him sometime later, but he doesn't say when.Cash 2,000 Loan Payable 2,0007. A client is extremely dissatisfied with their class, and demands their money back. Reluctantly, you agree. The class cost $15.Revenue 15 Cash 15or Refund expense 15 Cash 158. After borrowing money, you decide to withdraw some of your investment in the studio to pursue other opportunities. You decide to withdraw $1,000.Contributed capital 1,000 Cash 1,000(this cannot be a dividend, because your balance of retained earnings is negative. )
The General Journal
The general journal is where double entry bookkeeping entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.
Depending on the business's accounting information system, specialized journals may be used in conjunction with the general journal for record-keeping. In such case, use of the general journal may be limited to non-routine and adjusting entries
Special journals are designed to facilitate the process of journalizing and posting transactions. They are used for the most frequent transactions in a business. For example, in merchandising businesses, companies acquire merchandise from vendors and then in turn sell the merchandise to individuals or other businesses. Sales and purchases are the most common transactions for merchandising businesses. A business like a retail store will record the following transactions many times a day for sales on account and cash sales.
Items are entered the general journal or the special journals via journal entries, or journalizing. Journal entries are prepared after examining the source document to see if a business transaction has taken place. If a business transaction has taken place, that is a transaction that causes a measurable change in the accounting equation then a journal entry is necessary . Each journal entry must have a debit and a credit. Journal entries also include the date of the transaction, titles of the accounts debited and credited (credited account is indented several spaces), the amount of each debit and credit; and an explanation of the transaction also known as a Narration.