In accounting, everything has a value—positive or negative—and these things appear in one’s accounting mindset. Accounting is more like storytelling than math, though this story is told with numbers. When writing journal entries, or “journalizing,” you tell the story of a company’s financial picture.
Accounting involves money coming in, and money going out. Debits record all the money flowing into the account, while credits record all the money flowing out of the account. Much like your personal finances/budget, there are income and investments (credits) and there are bills to pay (debits).
Journalizing requires us to answer two questions. If you like metaphors: An account is a bucket. Let’s say you fill a bucket with money specifically for college.
Question 1: What did you give? Money!
Question 2: What do you get? Your college tuition (pulled from an enormous bucket)
*Note: This guide assumes some knowledge of the accounting cycle. Please review this resource—which defines the steps in the accounting cycle—before beginning the journal entry lesson: The Accounting Cycle: A Basic Overview
As we continue to define and practice journalizing, we must “account” for the hard and fast rule of the process:
Debits must always equal Credits!
Why? Because journal entries are transactions. In every transaction at least two things are being affected: what was exchanged for what? All transactions are, in effect, a trade of equal value. Since your journal entries are the first step in the accounting cycle, they must be accurate. If your journal entries have errors, the rest of the reports in the cycle will have errors! Below is a debits and credits reference table, which explains each kind of transaction, and whether it is a positive value (a credit) or a negative one (a debit). View the whole resource here:
*Note: As you do your work, you are likely to see charts and accounts in Excel, under different tabs.
| Type of Account | Normal Balance | To Increase | To Decrease |
| Assets | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Stockholder's Equity | Credit | Credit | Debit |
| Operating Revenues | Credit | Credit | Debit |
| Operating Expenses | Debit | Debit | Credit |
| Non Operating Revenues/Expenses | Credit | Credit | Debit |
| Non Operating Expenses/Losses | Debit | Debit | Credit |
Now that you have a reference, you can begin to journalize. To begin a journal entry, there must be a chart of accounts to choose from, like so:
Chart of Accounts Example:
| Asset Accounts | Liability Accounts |
Equity Accounts | Revenue Accounts |
Expense Accounts |
| Cash Acct 101 |
Notes Payable Acct 201 |
Common Stock Acct 301 |
Bakery Sales Acct 401 |
Rent Expense Acct 501 |
| Prepaid Rent Acct 102 |
Accounts
Payable Acct 202 |
Dividends Acct 302 |
Merchandise
Sales Acct 402 |
Telephone
Expense Acct 502 |
| Banking Supplies Acct 103 |
Wages Payable Acct 203 |
Acct 303 |
Acct 403 |
Wages Expense Acct 503 |
|
Acct 104 |
Acct 204 |
Acct 304 |
Acct 404 |
Acct 504 |
Let’s Try it!
Using the chart of accounts above and the journal entries below, solve the example problems. Answers provided on the next page.
Journal Entry:
| Date | Accounts | Debits | Credits |
| 10/1/2022 | Cash | 50,000.00 | |
| Common Stock | 50,000.00 | ||
| 10/7/2022 | Rent Expense | 500.00 | |
| Prepaid Rent | 500.00 | ||
| Cash | 1,000.00 | ||
| Total (due to the debits equal credits) | 51,000.00 | 51,000.00 | |
Journal Entry Problem 1:
October 1: The business owner used $50,000 from their personal savings account to buy common stock in their company.
Journal Entry Problem 2:
October 7: Entered into a lease agreement for bakery space. The agreement is for one year. The rent is $500 per month; the last month’s rent payment of $500 is required at the time of the lease agreement. The payment was made in cash. Lease period is effective October 1 of this year through September 30 of the next.
Journal Entry 1, Answer:
What did you give? $50,000 cash
What did you get? $50,000 cash to invest in common stock for your company.
Journal Entry 2, Answer:
What did you give? $1,000 cash
What did you get? A building lease for your business.
$500 rent expense to lease building for the month and the $500 prepaid security deposit of the leasing contract, totaling $1000.