The journal is the point of entry of business transactions into the accounting system.

It is a chronological record of the transactions, showing an explanation of each transaction, the accounts affected, whether those accounts are increased or decreased, and by what amount. A general journal entry takes the following form:

Date

Name of account being debited Amount Name of account being credited Optional: short description of transaction

Amount

Consider the following example that illustrates the basic concept of general journal entries. Mike Peddler opens a bicycle repair shop. He leases shop space, purchases an initial inventory of bike parts, and begins operations. Here are the general journal entries for the first month: Date 9/1 Account Names & Explanation Cash Capital Owner contributes $7500 in cash to capitalize the business. Bike Parts Accounts Payable Purchased $2500 in bike parts on account, payable in 30 days. Expenses Cash Paid first month's shop rent of $1000. Cash Accounts Receivable Revenue Repaired bikes for $1100; collected $400 cash; billed customers for the balance. Expenses Bike Parts $275 in bike parts was used. Cash Debit 7500 Credit 7500

9/8

2500 2500

9/15

1000 1000

9/17

400 700 1100

9/18

275 275

9/25

425

Accounts Receivable Collected $425 from customer accounts. 9/28 Accounts Payable Cash Paid $500 to suppliers for parts purchased earlier in the month. 500

425

500

General Ledger
The general ledger is a collection of the firm's accounts. While the general journal is organized as a chronological record of transactions, the ledger is organized by account. In casual use the accounts of the general ledger often take the form of simple two-column T-accounts. In the formal records of the company they may contain a third or fourth column to display the account balance after each posting.

Cash Sep 1 7500 Sep 15 17 400 28 25 425 Bal. 6825 Parts Inventory Sep 8 2500 Sep 18

1000 500

Accounts Receivable Sep 17 700 Sep 25 425

Bal.

275

275

Accounts Payable Sep 28 500 Sep 8 2500

Bal.

2225 Capital Sep 1

Bal. Revenue Sep 17

2000

7500

1100

Bal. Expenses 1000 275 1275

7500

Bal.

1100

Sep 15 Sep 18 Bal.

Trial Balance

If the journal entries are error-free and were posted properly to the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credits, then an error has occurred somewhere in the process. The total of the accounts on the debit and credit side is referred to as the trial balance. Once the account balances are known, the trial balance can be calculated as shown:

Debits Credits Account Title Cash 6825 Accounts Receivable 275 Parts Inventory 2225 Accounts Payable 2000 Capital 7500 Revenue 1100 Expenses 1275

10600

10600