When Recording Journal Entries, Which Account Titles Are Indented?
Understand the foundational formatting of journal entries. Learn the essential rule for clear and accurate financial transaction recording.
Journal entries serve as the initial record of financial transactions within a business. They capture the day-to-day economic activities, providing a chronological log of how money moves in and out, and how assets, liabilities, and equity are affected. This recording process forms the data for subsequent accounting procedures and is essential for generating accurate financial statements, such as the balance sheet and income statement.
Understanding Journal Entries
A journal entry is structured to reflect the dual effect of every financial transaction on a business’s accounts. This is based on the double-entry accounting system, where each transaction impacts at least two accounts: one with a debit and another with a credit. The fundamental accounting equation, Assets = Liabilities + Equity, remains in balance because debits and credits must always equal each other for every entry. A typical journal entry includes columns for the date, the specific account titles, and separate columns for debit and credit amounts.
Applying the Indentation Rule
When preparing a journal entry, a specific formatting rule is applied to visually distinguish between the debit and credit components of a transaction. This rule dictates that the account(s) being credited are always indented. This indentation enhances readability and clarity, making it easier to identify which accounts are debited and which are credited. The account(s) to be debited are listed first, flush with the left margin, and are not indented. Following the debit entry, the account(s) to be credited are listed on the next line, indented to the right, reinforcing the double-entry principle.
Illustrative Journal Entries
Let’s explore several common transactions to see how the indentation rule is applied in practice.
Example 1: Purchase of Supplies on Credit
If a business purchases $500 worth of office supplies on credit, the journal entry reflects an increase in supplies (an asset) and an increase in accounts payable (a liability).
July 10
Supplies 500
Accounts Payable 500
To record the purchase of supplies on account.
Example 2: Receiving Cash for Services Rendered
When a business receives $1,200 cash for services provided, this transaction increases the cash account (an asset) and increases service revenue (an equity account).
July 15
Cash 1,200
Service Revenue 1,200
To record cash received for services rendered.
Example 3: Payment of Monthly Rent Expense
When a business pays its monthly rent of $800 using cash, the rent expense account (an equity account) increases, and the cash account (an asset) decreases.
July 20
Rent Expense 800
Cash 800
To record payment of monthly rent.
These examples demonstrate how the non-indented debit account is listed first, followed by the indented credit account, with corresponding amounts and a brief description.