A journal entry in accounting is a record of a business transaction in the general ledger. Each journal entry consists of at least one debit and one credit, and the total amount of debits must equal the total amount of credits. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
Understanding Debit and Credit
- Debits (Dr): These entries increase assets or expenses and decrease liabilities, equity, or revenue accounts.
- Credits (Cr): These entries decrease assets or expenses and increase liabilities, equity, or revenue accounts.
Basic Examples of Debit and Credit Journal Entries
Example 1: Cash Purchase of Inventory
Scenario: Your business purchases $10,000 worth of inventory for cash.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-15-2024 | Inventory | 10,000 | |
| 08-15-2024 | To Cash | 10,000 |
Explanation:
- Inventory will debited to increase the inventory asset account.
- Cash will credited to decrease the cash asset account since money is paid out.
Example 2: Sales on Credit
Scenario: Your business sells goods worth $5,000 on credit.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-20-2024 | Accounts Receivable | 5,000 | |
| 08-20-2024 | To Sales Revenue | 5,000 |
Explanation:
- Accounts Receivable will debited to increase the amount due from the customer.
- Sales Revenue will credited to recognize the revenue earned from the sale.
Example 3: Payment of Rent
Scenario: Your business pays $2,000 in rent for the month.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-25-2024 | Rent Expense | 2,000 | |
| 08-25-2024 | To Cash | 2,000 |
Explanation:
- Rent Expense will debited to record the expense incurred.
- Cash will credited to reflect the cash outflow.
Example 4: Owner’s Capital Contribution
Scenario: The business owner contributes $15,000 in cash to the business.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-10-2024 | Cash | 15,000 | |
| 08-10-2024 | To Owner’s Capital | 15,000 |
Explanation:
- Cash will debited to increase the cash asset account.
- Owner’s Capital will credited to increase the owner’s equity in the business.
Example 5: Borrowing from a Bank
Scenario: Your business takes out a $20,000 loan from the bank.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-05-2024 | Cash | 20,000 | |
| 08-05-2024 | To Bank Loan Payable | 20,000 |
Explanation:
- Cash will debited to increase the cash asset account.
- Bank Loan Payable will credited to increase the liability for the loan.
Key Takeaways
- Debits are used to increase asset or expense accounts and decrease liability, equity, or revenue accounts.
- Credits are used to decrease asset or expense accounts and increase liability, equity, or revenue accounts.
- Every journal entry must have at least one debit and one credit, and the total debits must equal the total credits.
These examples illustrate the basic mechanics of debit and credit in journal entries, which are foundational concepts in double-entry bookkeeping.