Chapter 5 lesson 1 Journal Entries & Ledgers

Think of a journal as a daily diary for your business’s financial activities. Every time something happens—whether you make a sale, pay a bill, or receive a loan—you write it down in the journal. A typical journal entry includes the date of the transaction, the accounts affected, the amounts debited and credited, and a brief description or reference. For example: June 1 – Debit Cash $1,000, Credit Sales Revenue $1,000 (Cash sale to customer). This format helps clearly explain what occurred and how it impacts the business’s financial records.

Every journal entry involves at least two accounts—one is debited and the other is credited. However, debits and credits don’t always mean “increase” or “decrease.” Their effect depends on the type of account involved. For example, assets increase with a debit and decrease with a credit, while liabilities and equity increase with a credit and decrease with a debit. Income also increases with a credit and decreases with a debit, whereas expenses increase with a debit and decrease with a credit. Once you understand this basic pattern, recording journal entries becomes much more manageable and far less confusing.

Once a journal entry is made, it must be posted to the General Ledger. This involves transferring the details of the transaction to the individual account records—such as Cash, Sales, or Rent Expense. For example, if you recorded a journal entry for paying rent by debiting Rent Expense $500 and crediting Cash $500, you would then update the Rent Expense account in the ledger to reflect the increase, and the Cash account to show the decrease. This process ensures that each account remains accurate and up to date, providing a clear and complete picture of the business’s financial activity.