Journal Entries

Analyzing transactions and recording them as journal entries is the first step in the accounting cycle. It begins at the start of an accounting period and continues throughout the period. Transaction analysis is a process that determines whether a particular business event has an economic effect on the assets, liabilities or equity of the business. It also involves ascertaining the magnitude of the transaction i.e. its currency value.

After analyzing transactions, accountants classify and record the events having an economic effect via journal entries according to debit-credit rules. Frequent journal entries are usually recorded in specialized journals, for example, sales journal and purchases journal. The rest are recorded in a general journal.

The following example illustrates how to record journal entries:


Company A was incorporated on January 1, 20X0 with an initial capital of 5,000 shares of common stock having $20 par value. During the first month of its operations, the company engaged in the following transactions:

Jan 2An amount of $36,000 was paid as advance rent for three months.
Jan 3Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining amount was recognized as a one year note payable with an interest rate of 9%.
Jan 4Purchased office supplies costing $17,600 on account.
Jan 13Provided services to its customers and received $28,500 in cash.
Jan 13Paid the accounts payable on the office supplies purchased on January 4.
Jan 14Paid wages to its employees for the first two weeks of January, aggregating $19,100.
Jan 18Provided $54,100 worth of services to its customers. They paid $32,900 and promised to pay the remaining amount.
Jan 23Received $15,300 from customers for the services provided on January 18.
Jan 25Received $4,000 as an advance payment from customers.
Jan 26Purchased office supplies costing $5,200 on account.
Jan 28Paid wages to its employees for the third and fourth week of January: $19,100.
Jan 31Paid $5,000 as dividends.
Jan 31Received an electricity bill of $2,470.
Jan 31Received a telephone bill of $1,494.
Jan 31Miscellaneous expenses paid during the month totaled $3,470

The following table shows the journal entries for the above transactions.

Jan 1Cash100,000 
 Common Stock 100,000
Jan 2Prepaid Rent36,000 
 Cash 36,000
Jan 3Equipment80,000 
 Cash 60,000
 Notes Payable 20,000
Jan 4Office Supplies17,600 
 Accounts Payable 17,600
Jan 13Cash28,500 
 Service Revenue 28,500
Jan 13Accounts Payable17,600 
 Cash 17,600
Jan 14Wages Expense19,100 
 Cash 19,100
Jan 18Cash32,900 
 Accounts Receivable21,200 
 Service Revenue 54,100
Jan 23Cash15,300 
 Accounts Receivable 15,300
Jan 25Cash4,000 
 Unearned Revenue 4,000
Jan 26Office Supplies5,200 
 Accounts Payable 5,200
Jan 28Wages Expense19,100 
 Cash 19,100
Jan 31Dividends5,000 
 Cash 5,000
Jan 31Electricity Expense2,470 
 Utilities Payable 2,470
Jan 31Telephone Expense1,494 
 Utilities Payable 1,494
Jan 31Miscellaneous Expense3,470 
 Cash 3,470

At the end of the period, all the journal for the period are posted to the ledger accounts.

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