Lesson 15 - Beginner accounting course

15. Common Journal Entries in Accounting

In accounting, journal entries are the backbone of financial record-keeping. They are used to document every transaction that occurs within a business. Each journal entry typically involves at least two accounts, one being debited and the other credited, following the rules of debits and credits. Journal entries are the first step in the accounting cycle and serve as the foundation for preparing financial statements.

Journal entries can be made for a variety of business activities such as sales, purchases, expenses, investments, and more. Below are some of the most common journal entries in accounting, along with explanations and examples to help you understand their structure and purpose.

1. Sales Transactions

When a company sells goods or services to customers, a journal entry is made to record the revenue generated from the sale. The entry involves debiting the accounts receivable (if the sale is on credit) or cash (if the sale is immediate), and crediting the sales revenue account.

Example: A company sells goods worth $1,000 on credit.

• Debit: Accounts Receivable (Asset) $1,000

• Credit: Sales Revenue (Revenue) $1,000

Explanation:

• The company will receive payment in the future (Accounts Receivable increases).

• The company earned $1,000 in revenue from the sale (Sales Revenue increases).

2. Cash Purchases

When a business purchases goods or services and pays for them immediately, the journal entry reflects a debit to the expense or asset account and a credit to cash.

Example: A company purchases office supplies for $200 in cash.

• Debit: Office Supplies (Asset) $200

• Credit: Cash (Asset) $200

Explanation:

• The company increases its office supplies inventory (Office Supplies increases).

• The company reduces its cash balance (Cash decreases).

3. Accrued Expenses

When a company incurs an expense but hasn't yet paid for it, the journal entry records the liability and the expense. This is known as accruing an expense.

Example: The company owes $500 for utilities that it has used but hasn't paid yet.

• Debit: Utilities Expense (Expense) $500

• Credit: Accounts Payable (Liability) $500

Explanation:

• The company has incurred an expense for utilities (Utilities Expense increases).

• The company owes money for the utilities (Accounts Payable increases).

4. Payment of Accrued Expenses

When the company eventually pays off the accrued expense, a journal entry is made to reduce the liability and decrease the cash balance.

Example: The company pays $500 for the utilities that were previously accrued.

• Debit: Accounts Payable (Liability) $500

• Credit: Cash (Asset) $500

Explanation:

• The company settles the liability for utilities (Accounts Payable decreases).

• The company reduces its cash balance (Cash decreases).

5. Receiving Cash from a Customer

When a customer makes a payment for a sale previously made on credit, the journal entry records a debit to cash and a credit to accounts receivable.

Example: A customer pays $1,000 for the goods sold on credit.

• Debit: Cash (Asset) $1,000

• Credit: Accounts Receivable (Asset) $1,000

Explanation:

• The company receives cash from the customer (Cash increases).

• The company reduces the amount it is owed by the customer (Accounts Receivable decreases).

6. Payroll Entries

Payroll is a critical part of accounting, as businesses must account for wages, taxes, and deductions for their employees. A journal entry is made each pay period to record wages and the related liabilities.

Example: The company pays $2,000 in wages, with $500 in taxes withheld.

• Debit: Wages Expense (Expense) $2,000

• Credit: Cash (Asset) $1,500

• Credit: Taxes Payable (Liability) $500

Explanation:

• The company records the wages expense (Wages Expense increases).

• The company pays part of the wages in cash (Cash decreases).

• The company owes taxes to the authorities (Taxes Payable increases).

7. Depreciation of Assets

Depreciation is an accounting method for allocating the cost of a tangible asset over its useful life. The company records depreciation as an expense, while also reducing the asset's book value.

Example: A company depreciates a machine by $1,000 for the period.

• Debit: Depreciation Expense (Expense) $1,000

• Credit: Accumulated Depreciation (Asset) $1,000

Explanation:

• The company records the depreciation expense (Depreciation Expense increases).

• The company reduces the asset’s value over time (Accumulated Depreciation increases).

8. Issuing Shares of Stock

When a company issues shares to raise capital, it records the increase in equity by crediting the common stock or capital stock account.

Example: The company issues 100 shares of stock at $10 per share.

• Debit: Cash (Asset) $1,000

• Credit: Common Stock (Equity) $1,000

Explanation:

• The company raises money by issuing shares (Cash increases).

• The company increases its equity (Common Stock increases).

9. Paying Dividends

When a company distributes dividends to its shareholders, a journal entry is made to reduce retained earnings and cash.

Example: The company pays $500 in dividends to shareholders.

• Debit: Retained Earnings (Equity) $500

• Credit: Cash (Asset) $500

Explanation:

• The company reduces retained earnings by the amount of the dividend (Retained Earnings decreases).

• The company reduces its cash balance (Cash decreases).

Conclusion

Common journal entries are essential for recording transactions accurately and ensuring the financial statements are correct. These entries reflect the various business activities that affect the company’s assets, liabilities, equity, revenues, and expenses. Understanding these journal entries allows accountants to maintain accurate records and ensures that the company’s financial position is correctly reflected in its accounting system.