Journal Entries and Posting to the Ledger
Mr. Ernesto opens a taco shop, "El Fogón Norte." In one week he buys meat, sells tacos, pays the rent, and receives money from his customers. By Saturday he wants to know how much he has in the bank, but all he has is a pile of notes. How can all of that be organized so that anyone can read it and check it? With two books: the journal, where each transaction is recorded in order, and the ledger, where everything for each account is brought together.
The General Journal: One Transaction, One Entry
The general journal records the business's transactions in chronological order. Each transaction is recorded in an entry, which always has at least one debit and one credit for the same total amount (double entry).
To decide what to debit and what to credit, remember the usual rule:
| Type of account | Increases with | Decreases with |
|---|---|---|
| Asset (Bank, Cash, Inventory) | Debit | Credit |
| Liability (Accounts payable) | Credit | Debit |
| Owner's equity | Credit | Debit |
| Revenue (Sales) | Credit | Debit |
| Expenses (Rent) | Debit | Credit |
The entry has this form:
The account that is credited is written slightly to the right, so you can tell it apart at a glance.
The owner of the taco shop «El Fogón Norte» contributes $\$50,000.00…
The owner of the taco shop «El Fogón Norte» contributes $\$50,000.00$ and deposits it into the business bank account. Write the corresponding journal entry: state the account that is debited, the one that is credited, and the amount, following the proper order of an entry (debit first, then credit).
Common Transactions: Cash, Credit, and Payments
Three questions help you build any entry:
-
Which accounts change?
-
What type is each one (asset, liability, equity, revenue, expense)?
-
Does it go up or down? With the table you know whether it is a debit or a credit.
The taco shop «El Fogón Norte» carries out these three transactions during the week: 1. It buys supplies (meat, tortillas, vegetables) on credit for $\$6,300.00…
The taco shop «El Fogón Norte» carries out these three transactions during the week:
-
It buys supplies (meat, tortillas, vegetables) on credit for $\$6,300.00$.
-
It records Saturday's sales, collected in cash, for $\$9,750.00$.
-
It pays $\$7,000.00$ for the shop's rent by bank transfer.
Write the three journal entries: in each one, state which account is debited, which one is credited, and for what amount.
The General Ledger and T-Accounts
The journal organizes by date, but it does not say how much is in Bank. For that, you do the posting to the ledger: each debit and each credit is copied to the corresponding account, represented as a T-account.
Debits go on the left (debit side) and credits on the right (credit side). Each line of the entry is posted to its account, with the same amount and on the same side.
The Balance of an Account
The balance is the difference between the sum of the debits and the sum of the credits.
Assets and expenses normally have a debit balance. Liabilities, equity, and revenue have a credit balance.
The Bank account of the stationery shop «El Compás» sums up the week's movements in the general ledger as follows: | Debit | Credit | | --- | --- | | Owner's…
The Bank account of the stationery shop «El Compás» sums up the week's movements in the general ledger as follows:
| Debit | Credit |
|---|---|
| Owner's contribution: $\$50,000.00$ | Merchandise purchase: $\$12,500.00$ |
| Cash sales: $\$9,750.00$ | Rent payment: $\$7,000.00$ |
| Electricity bill: $\$3,200.00$ |
- a) Compute the sum of the debits and the sum of the credits.
- b) Work out the account balance and say whether it is a debit or a credit balance.
- c) Explain in your own words what that balance means for the business.
Why Check the Records
Every entry debits and credits the same amount, so if the records were done correctly, the sum of all the debits must equal the sum of all the credits. Before preparing the financial statements, this is checked in the trial balance, the topic of the next section. An error when posting from the journal to the ledger (recording an amount on the wrong side, forgetting a line) breaks that equality and is detected there.
Go back to the beginning: Mr. Ernesto can now organize his notes. Each transaction goes into the journal as an entry (debit first, credit after), it is posted to the T-accounts of the ledger, and the balance of Bank tells him how much money he has.