Preparing Journal Entries

The best way to learn accounting is to work with examples. Let's get started.

Let’s first review the rules of debits and credits by working with the accounting equation (Assets = Liabilities + Stockholders’ Equity). Assets are increased with debits and decreased with credits.

Liabilities are increased with credits and decreased with debits.

Stockholders’ Equity consists of several accounts:

Common Stock, Retained Earnings, and Revenues all increase Stockholders’ Equity and are increased with credits. Expenses and Dividends are overall decreases to Stockholders’ Equity and are increased with debits.

We will work with a two step process.
Step 1 - Analyze the transaction.
Step 2 - Record the transaction in the general journal.

Transaction 1 - A new corporation issues 1,000 shares of common stock and receives $75,000 cash.

Step 1 -- The corporation is raising capital by issuing shares of its stock.

Accounts Affected:
Assets – Cash is increased.
Stockholders' Equity - Common Stock is increased.

Step 2 -- The journal entry is
Cash 75,000
Common Stock 75,000

Transaction 2 -- The corporation acquires equipment. The purchase price is $100,000. The corporation pays $25,000 cash and signs a note for the balance.

Step 1 -- The asset, equipment, is acquired. The note payable represents debt and is a liability which is being increased. Some students want to use Accounts Payable. Accounts Payable is a liability but it reflects informal credit arrangements that are generally due in 30 - 45 days. Notes Payable, however, are formal legal promissory notes that have specific due dates, generally bear interest, and have a higher legal standing in a bankruptcy proceeding. Also, some students do not want to record an asset unless it has been fully paid for. Assets are recorded even if there is related debt. The company still owns the asset. Though the corporation does not have...