Basic Accounting Entries

In this lesson we shall try to make simple journal entries for a business and then post them to the ledger accounts.

The 3 Golden rules of Accounting: 1. Debit what comes in and Credit what goes out. 2. Debit all expenses and Credit all incomes. 3. Debit the receiver and Credit the giver.

Exercise 1 Assets Transaction Entries 1 Cash paid to buy goods worth $2000. 2. Purchased machine worth $10,000 in cash.

Liability Transaction Entries 1. Took loan of $5000 from Kabul bank. 2. Purchased goods worth $6000 on credit from Ali & Co. 3. Owner contributed capital $10,000

Income Transaction Entries 1 Sales of $5000 in cash. 2. Sales of $4000 on credit to Rehmat.

Expense Transaction Entries 1. Paid fuel expenses of $400 in cash. 2. Repaid loan of $5000 along with interest expense of $500.

Date

Explanation Goods a/c Dr. To Cash a/c

(Cash paid to buy goods)

Ref.

Debit $2000

Credit $2000

Machine a/c To Cash a/c

(Cash paid to buy machine)

Dr.

10000 10000 5000 5000 6000 6000 10000 10000

Cash a/c Dr. To Loan a/c

(Took a loan of from Kabul bank)

Goods a/c Dr. To Ali & Co. a/c

(purchased goods on credit)

Cash a/c Dr. To Capital a/c

(Capital contributed by the owner)

Date

Explanation Cash a/c To Sales a/c

(Sales of goods for cash)

Ref Debit . Dr. $ 5000

Credit

$ 5000 Dr. 4000 4000 Dr. 400 400 Dr. Dr. 5000 500 5500

Rehmat a/c To Sales a/c

(Credit sales to Rehmat)

Fuel expenses a/c To Cash a/c

(Cash paid for fuel expenses)

Loan a/c Interest expense a/c To Cash a/c

(repaid loan along with the interest expense) THIS IS AN EXAMPLE OF COMPOUND JOURNAL ENTRY

A journal entry in which more than 2 accounts are affected is called a COMPOUND JOURNAL ENTRY.

Posting to ledger accounts: Means transfer of entries from the journal to the appropriate ledger accounts. Steps to post a transaction from Journal to Ledger account : 1. If an account is getting debited in the journal entry, put the amount on the debit side of the account while posting. In the particulars column, write To [name of account which is being credited in the journal entry]. 2. If an account is getting credited in the journal entry, put the amount on the credit side of the account while posting. In the particulars column, write By [name of account which is being debited in the journal entry].

Steps to get the balance of an account: 1. Total both the debit and credit sides of the account. 2. Write the total of the bigger side at the bottom of both the sides of the account. 3. Write the difference on the side with the smaller total; along with the following lines in particulars column ; To Balance c/d (if dr. side total < cr. side total) By Balance c/d (if dr. side toal > cr. side total)

dr.

Cash Account

cr.

Date

Particulars
To Loan a/c To capital a/c To sales a/c

Amount $ Date Particulars

5000 10000 5000 By goods a/c By machine a/c By Fuel exp a/c By Loan a/c By Interest expense a/c By balance c/d

Amo unt $
2000 10000 400 5000 500 2100 20000

20000

So we can see that the closing balance of the cash account on is $ 2,100

Important points regarding account balances : 1. Asset accounts and expense accounts usually have debit balances. 2. Liability accounts and income accounts usually have credit balances. These two rules along with the 3 rules of debit and credit make journalizing and posting very easy for the accountant.

Exercise 2 MAKE JOURNAL ENTRIES OF THE FOLLOWING ACCOUNTING EVENTS AND THEN POST THEM TO THE APPROPRIATE ACCOUNTS: 1. On 04/05/2008, Hamid started business (his factory) with a capital $ 1,00,000. 2. Bought machine for $20,000 on 09/05/2008. 3. He purchased raw-materials worth $ 2,000 on credit of 30 days from Ali & Co. on 11/05/2008. 4. Paid $400 in cash for fuel expenses on 15/05/2008. 5. Salary paid on 01/06/2008 , $ 5,000. 6. Took loan of $30,000 from bank on 07/08/2008.

Date

Explanation

Ref. 12 01

Debit $ 1,00000

Credit $ 1,00000

04/05/2008 Cash a/c Dr. Capital a/c

Capital contributed to start the business

09/05/2008 Machine a/c Dr. Cash a/c

Machine purchased

20 12 22 23 25 12 30 12

20,000 20,000 2,000 2,000 400 400 5000 5000

11/05/2008

Raw materials a/c Dr. Ali & Co.

Credit purchase of raw-materials

15/05/2008 Fuel expenses a/c Cash a/c 01/06/2008 Salary a/c Dr. Cash a/c
Salary paid

Dr.

Fuel expenses paid in cash

Date

Explanation

Ref.

Debit 30,000

Credit 30,000

07/08/2008 Cash a/c Dr. Loan a/c

Loan taken from bank

dr.

Cash Account

cr.

Date

Particulars Amount $ Date

1,00,000 09/05/08 15/05/08 01/06/08 07/08/08

Particulars
By machine a/c By Fuel exp a/c By Salary a/c By balance c/d

Amount $
20,000 400 5,000 1,04,600 1,30,000

04/05/08 To capital a/c

07/08/08 To Loan a/c

30,000 1,30,000

So we can see that the closing balance of the cash account on 07/08/08 is $ 1,04,600.

Dr.

capital account

Cr.

Date

Particulars

Amount $ Date

Particulars

Amount $
1,00,000 1,00,000

04/05/08 To balance c/d 1,00,000 1,00,000

04/05/08 By cash a/c

Dr.

machine account

Cr.

Date

Particulars

Amount $ Date
20,000 20,000

Particulars

Amount $
20,000 20,000

09/05/08 To cash a/c

09/05/08 By balance c/d

Dr.

Raw materials account

Cr.

Date

Particulars

Amount $ Date
2000 2000

Particulars

Amount $
2000 2000

11/05/08 To Ali & Co.a/c

11/05/08 By balance c/d

Dr.

Ali & Co. account

Cr.

Date

Particulars

Amount $ Date

Particulars

Amount $
2,000 2,000

11/05/08 To balance c/d 2,000 2,000

11/05/08 By rawmaterials a/c

Dr.

Fuel expenses account

Cr.

Date

Particulars

Amount $ Date
400 400

Particulars

Amount $
400 400

15/05/08 To cash a/c

15/05/08 By balance c/d

Dr.

Salary account

Cr.

Date

Particulars

Amount $ Date
5,000 5,000

Particulars

Amount $
5,000 5,000

01/06/08 To cash c/d

01/06/08 By balance c/d

Dr.

Loan account

Cr.

Date

Particulars

Amount $ Date

Particulars

Amount $
30,000 30,000

07/08/08 To balance c/d 30,000 30,000

07/08/08 By cash a/c