Journal in Accounting

What is Journal in Accounting?

Journal in accounting is named as the book of original entry. It’s called the book of original entryBook Of Original Entry The book of original entries, or the first entry book, is where the entire journal entries are recorded with all the supporting documents & transactions details. It provides existence & accuracy of the financial transactions posted, recorded or transferred in the individual ledgers.read more because if any financial transaction occurs, the accountant of a company would first record the transaction in the journal. That’s why a journal in accounting is critical for anyone to understand. No matter who you are, a would-be accountant, a finance enthusiast, or an investor who would like to understand the inherent transactions of a company, you need to know how to pass a journal entry before anything else.

Double-entry system

The double entry system is the system that is used to record entry in the journal. Let’s understand what double entry systemDouble Entry System Double Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more is. The double entry system is a system that has two parts – debit and credit. If you know what a debit and what a credit are, you would be able to understand the entire financial accounting quite effectively.

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Source: Journal in Accounting (wallstreetmojo.com)

Let’s understand the rules of debit and credit briefly and then we will see the examples of journal entries –

Debit the account when assets and expenses increase.
Debit the account when liabilitiesLiabilities Liability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more and revenues decrease.
Credit the account when assets and expenses decrease.
Credit the account when liabilities and revenues increase.

The following examples will help us understand how to debit and credit the accounts in transactions.

How to Make Journal Entries in Accounting?

Example#1

Mr. M buys goods in cash. What would be the journal accounting entry?

As we know the rules of debit and credit, we can see that Mr. M is expending cash; that means cash is going out, and instead of cash, he is receiving goods. That means “cash”, a current asset is decreasing, and “purchase,” an expense is increasing.

As per the rule, we will credit the account when the asset decreases, and we will debit the account when the expense increases.

So, the journal entry in accounting book would be –

Purchase A/C…..Debit

To Cash A/C…..Credit

Example#2

G Co. sells goods in cash. Which account will be debited and which account will be credited?

G Co. sells goods in cash, meaning cash is coming in, and goods are going out. “Cash” is an asset that is increasing, and “sales” is a revenue account that is increasing.

As per the rules of debit and credit, when “asset” increases, it is debited; and when “revenue” increases, it is credited.

So, here the journal entry in accounting book would be –

Cash A/C……Debit

To Sales A/C…..Credit

Example#3

Mr. U pays off his long term debtTerm Debt Long-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more in cash. What would be the journal entry?

Here we can see that Mr. U is paying cash; that means “cash” is going out. And as a result, his long-term debt is also getting checked off. That means “long-term debt,” which is a liability, is getting decreased.

As per the debit and credit rule, when an asset gets reduced, it is credited, and when liability reduces, it is debited.

So the journal entry in accounting book would be –

Long term debt A/C……Debit

To Cash A/C……..Credit

Example#4

More capital is being invested in the company in the form of cash.

In this example, there are two accounts. One is “capital,” and another is “cash.”

Here, cash is invested in the business. As we know that cash is an asset, investing in a business means, the asset is increasing.

At the same time, due to more cash injection into the business, the capital, which is a liability, also increases. When liability increases, we credit the account.

So as per the rules of debit and credit, the journal entry in accounting would be –