How to Record Transactions in a General Journal

The general journal is a foundational accounting tool, serving as the initial record of all financial transactions. Often called the “book of original entry,” it documents every financial event chronologically. This systematic recording provides the data necessary for financial reporting and analysis.

Core Principles of Journalizing

Understanding how to record transactions begins with grasping core accounting principles. Debits and credits are fundamental concepts, serving as directional indicators for entries. Debits are recorded on the left side of an account, and credits are on the right. This dual-sided approach is central to the double-entry bookkeeping system, which mandates that every transaction impacts at least two accounts.

The accounting equation, Assets = Liabilities + Equity, provides the framework. Every transaction affects at least two components, ensuring the equation remains balanced. For instance, if assets increase, there must be a corresponding increase in liabilities or equity, or a decrease in another asset, to maintain balance.

Debits and credits affect accounts based on their “normal balance.” Assets (economic resources) and expenses (costs incurred) increase with debits and decrease with credits. Conversely, liabilities (obligations), equity (owners’ stake), and revenue (income earned) increase with credits and decrease with debits. For every transaction, total debits must always equal total credits, ensuring accuracy.

Components of a General Journal Entry

Each general journal entry begins with the transaction date, ensuring a chronological record. Next, the affected account titles are listed. The debited account is listed first, with its amount in the debit column.

The credited account is then listed on the next line, indented to distinguish it. Its amount is recorded in the credit column. Below the accounts, a brief description of the transaction is included. This narration provides context and clarifies the financial event for future reference.

An optional, but common, component is a reference column, often labeled “Post. Ref.” This column serves as a placeholder to indicate when the entry has been transferred, or “posted,” to the general ledger, which organizes transactions by account. While this column is part of the general journal format, the detailed process of posting itself occurs after the initial journal entry.

Recording Transactions in the General Journal

Recording transactions involves analyzing them to identify affected accounts and whether they are increasing or decreasing. For example, if a business receives cash for a service, both Cash and Service Revenue accounts are involved. Determining the change direction is crucial for applying correct debit and credit rules.

Next, apply debit and credit rules based on account type and change. Since Cash is an increasing asset, it is debited. Service Revenue is a revenue account, and an increase is credited. The transaction amount is the same for both debit and credit entries.

Finally, the entry is recorded in the general journal. This involves writing the date, listing the debited account and its amount, then indenting and listing the credited account with its amount. A concise description is added below the accounts.

Consider several common business transactions to illustrate this process.

Owner Investment

If an owner invests $10,000 cash into the business, the Cash account (an asset) increases, and the Owner’s Capital account (equity) increases.
Cash is debited for $10,000.
Owner’s Capital is credited for $10,000.
Description: Initial investment by owner.

Purchase of Equipment for Cash

A business buys equipment for $5,000 cash. The Equipment account (an asset) increases, and the Cash account (an asset) decreases.
Equipment is debited for $5,000.
Cash is credited for $5,000.
Description: Purchased equipment with cash.

Purchase of Supplies on Credit

Supplies costing $500 are purchased on account, increasing the Supplies account (asset) and the Accounts Payable account (liability).
Supplies is debited for $500.
Accounts Payable is credited for $500.
Description: Purchased supplies on account.

Services Rendered for Cash

A business performs services and immediately receives $1,200 cash. This increases the Cash account (an asset) and the Service Revenue account (revenue).
Cash is debited for $1,200.
Service Revenue is credited for $1,200.
Description: Received cash for services rendered.

Services Rendered on Account

Services are provided for $800, with the customer paying later. This increases the Accounts Receivable account (an asset) and the Service Revenue account (revenue).
Accounts Receivable is debited for $800.
Service Revenue is credited for $800.
Description: Provided services on account.

Payment of an Expense (e.g., Rent)

The business pays $700 for monthly rent. This increases the Rent Expense account (an expense) and decreases the Cash account (an asset).
Rent Expense is debited for $700.
Cash is credited for $700.
Description: Paid monthly office rent.

Receipt of Cash on Account

The business receives $800 cash from a customer for services previously rendered on account. This increases the Cash account (an asset) and decreases the Accounts Receivable account (an asset).
Cash is debited for $800.
Accounts Receivable is credited for $800.
Description: Received cash for services previously billed.

Owner Withdrawal

The owner withdraws $1,000 cash for personal use. The Owner’s Drawings account (a contra-equity account) increases, and the Cash account (an asset) decreases.
Owner’s Drawings is debited for $1,000.
Cash is credited for $1,000.
Description: Owner withdrew cash for personal use.