Capturing Economic Events (2)

Easy Method to journal entries.
Follow these simple steps. Ask yourself these questions:

1) Is Cash used in this transaction? Cash is your first Asset account, it falls on the Left side of the equation, and will be used very often. It is easy to remember the rules for the Cash account: Debit = Increase; Credit = Decrease.

2) Was Cash received or paid?

Cash Received = Increase = Debit Column = Left Column

Cash Paid = Decrease = Credit Column = Right Column

Decide whether Cash belongs in the Debit or Credit column, write the word "Cash" in the Account column, and the dollar amount in the Debit or Credit column. You are now half way done with the journal entry.

3) Enter the balancing dollar amount in the opposite column as Cash.
You don't need to worry about the other account title yet. Remember that a double-entry journal entry needs equal dollar amounts in the Debit and Credit column for each journal entry. Make that dollar entry now, and you're 75% done.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part of the journal entry. Use account titles exactly as they appear in the Chart of Accounts. Don't get creative and make up account titles. If you want to be creative take an art class. (hee, hee... just kidding ;-)

5) If Cash was not used you can substitute "Cash" temporarily where it would go IF it had been used in the transaction. For instance, suppose you are at a restaurant. You could pay in cash, or charge the meal on a credit card. Either way you have paid for a meal, and the journal entry will be very similar. So you can pencil in the word "cash" lightly where it would go. After you finish the journal entry, refer to the Chart of Accounts and replace "cash" with the appropriate account, which will usually end with "Payable" or "Receivable" such as Accounts Payable, Interest Receivable, etc.

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The Cash account is equivalent to the company's checking account. The balance goes up when money is deposited in the account, and the balance goes down when checks are written. It works just like your checking account!

So now you know that Cash is an Asset account, is on the Left side of the accounting equation, and the balance can go up or down. The rules you use for the Cash account will be the same for all asset accounts. Now you know how to make journal entries for all asset accounts. Wasn't that easy?

Liability and Owners' Equity accounts are on the Right side of the Accounting Equation, and they follow the OPPOSITE rules as the Cash account. Now you know how to make journal entries for all those accounts! Wasn't that easy, too?

So if you can remember one thing, how the Cash account works, you can easily figure out each and every other account. Since there are only 2 sides to the Accounting Equation, there are only 2 possibilities. Pretty simple.

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Let's try an easy example using my simple system.
Some transactions are routine and happen very frequently. It helps to know these, because they represent 99% of the total journal entries a company will make. All companies earn some sort of revenue, so let's look at a sale transaction:
March 20, the company made a cash sale for $100.

1) Is Cash used in this transaction? Yes.
2) Was Cash received or paid? Received. [Increase = Debit Column]
--- enter the Cash portion of the journal entry

Date	Account	Debit	Credit
Mar-20	Cash	$100

The date always starts a journal entry. Enter the month once on a page, and put the day in front of each journal entry on the page, even if they are all on the same date. The day indicates the beginning of a new journal entry. You should also leave one or two blank lines between journal entries on a page.

3) Enter the balancing dollar amount in the opposite column from Cash.

Date	Account	Debit	Credit
Mar-20	Cash	$100
			$100

Almost done.......

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is a sale, so we will use Sales Revenue for the Credit side of the journal entry.

Date	Account	Debit	Credit
Mar-20	Cash	$100
	Sales Revenue		$100

The journal entry is in balance, and is complete. The textbook will show that a memorandum can be entered on the line below the journal entry. This should be additional information that is not contained in the journal entry itself; information that will be useful when trying to reconstruct events at a later date.

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Another example. April 1, the company paid rent $500.
1) Is Cash used in this transaction? Yes.
2) Was Cash received or paid? Paid. [Decrease = Credit Column]
--- enter the Cash portion of the journal entry
3) Enter the balancing dollar amount in the opposite column as Cash.

Date	Account	Debit	Credit
Apr-1		$500
	Cash		$500

Note that it is customary to enter the debit part first, and the credit entry second. The credit entry account title is indented, to help set it off from the debit account titles. These practices are used to make the journal entry easier to read, and reduce errors in posting.

4) Refer to the information given, check the Chart of Accounts, tighten your thinking bolts and select the correct account for the second part. This is an example of paying an expense, in this case Rent Expense.

Date	Account	Debit	Credit
Apr-1	Rent Expense	$500
	Cash		$500