Bookkeeping Basics

Manage your transactions to streamline your business

Image shows a woman looking at a book. Title reads:

Image by Emily Mendoza © The Balance 2019

When you make a financial transaction, you make a journal entry in your accounting journal to record that transaction. The transaction is recorded in the general journal or one of the special journals for the most active accounts. The most common special journals are the sales journal, the purchases journal, the cash receipts journal, and the cash disbursements journal.

An accounting journal is a detailed record of the financial transactions of the business. The transactions are listed in chronological order. Depending on the size and complexity of your business, a reference number can be assigned to each transaction.

An accounting journal page has columns for the date, the account, and the amount debited or credited. Entries from the journal are posted (entered in) to the ledger. The ledger shows which accounts are affected and how they are affected.

When to Use a Debit or Credit in a Journal Entry

One of the most difficult things to grasp is when to enter debit or credit. This is generally confusing because our society is conditioned to think of one bank account with debit (out) and credit (in).

In double-entry bookkeeping, the debits and credits are different. Every transaction debits one account and credits another. When you think of accounts, don't think of a checking account with money going in and out.

You have multiple accounts in your business, such as an account for allowing your customers to purchase from you with the credit you have extended to them (accounts receivable, an asset account.)

There is an account for money owed to businesses you purchase from on credit extended to you (accounts payable, a liability account). The amount of cash you have on hand is an account (cash, an asset account.)

A debit increases an asset or expense account, while credit increases a liability or equity account. Consider this—when you make a purchase, one account decreases in value (value is withdrawn) and another account increases in value (value is received.) A chart of accounts can help you decide whether to debit or credit a certain type of account.

If you purchased a small printer for $100 for your business with your debit card, cash is withdrawn from your bank account and transferred to the business you bought it from. In double-entry bookkeeping, you took $100 from your cash account and moved it to your equipment account.

Both accounts are asset accounts. So, you credited your cash account and debited your equipment account. If you then sold the same printer for $100, you would credit your equipment account and debit your cash account. While this may not sound correct, your chart of accounts tells you that an equipment account decreases with a credit and a cash account increases with a debit.

Some general guidelines to assist you are:

  • You will always use both a debit and a credit for every journal entry. That is what the system of double-entry bookkeeping is based on. If you debit one account, another needs to be credited.
  • A chart of accounts tells you if an entry is a debit or credit.
  • There are five types of accounts—Assets, liabilities, shareholders' equity, revenues, and expense. Your chart of accounts will list the account sub-type (e.g. cash is an asset account) account number, title, how to increase it (debit or credit), and a description of the account. For example:
Asset Accounts
No. Account Title To Increase Description
101 Cash Debit Checks Received, Cash
102 Equipment Debit Office Equipment

Example of a Journal Entry

Here is an example of the journal entry you would make at the start of a new business. If an owner invested $20,000 in a new business, this would be the format of the journal entry. There would be an increase in assets and a decrease in equity. Specifically, the cash account would record a debit of $20,000, and the owners' equity account would be a credited $20,0000. In other words, the owners' equity account lost $20,000 and the cash account gained $20,000.

Format of Journal Entry

Owner Started Business
Account Debit Credit
Cash $20,000  
Owners' Equity   $20,000

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