Recording in the journal¶
You already know that a transaction hits at least two accounts, and that each account's normal balance tells you whether an increase is a debit or a credit. But knowing the rule and applying it, transaction after transaction, without losing track, are different skills. The general journal is the tool that keeps you honest: every transaction gets written down, in order, the moment it happens, in a format that any accountant, auditor, or piece of accounting software recognizes on sight. Once it's in the journal, nothing gets forgotten and nothing gets recorded twice.
The general journal¶
A journal entry has four parts, always in the same order: the date, the debit line or lines (flush left), the credit line or lines (indented, so your eye can tell them apart at a glance), and a brief explanation of what happened. Marlow Landscaping, a new corporation, opens for business in October. On October 5 it issues stock to investors for $18,000 cash.
Oct 5: Issuing stock
| Date | Account | Debit | Credit |
|---|---|---|---|
| Oct 5 | Cash | 18,000 | |
| Common Stock | 18,000 |
(To record issuance of common stock for cash.)
Why: What did Marlow get? Cash, an asset, so debit. What did it give up? Not a promise to do work, but ownership shares, so Common Stock, part of stockholders' equity, goes up: credit.
Common mistake: cash from investors is revenue
Cash came in, so it's tempting to call it revenue. It isn't. Revenue is only recorded when a company earns something by doing work. Selling stock earns nothing; it just brings in cash in exchange for a stake in the company. That's why the credit goes to Common Stock, not Service Revenue.
A compound entry: one debit, two credits¶
Most of Marlow's entries have exactly one debit line and one credit line. A compound entry has more than one debit line, more than one credit line, or both, but debits and credits still have to total the same amount. On October 7, Marlow buys equipment costing $6,000, paying $1,800 cash and signing a note payable for the rest.
Oct 7: Buying equipment, part cash and part note
| Date | Account | Debit | Credit |
|---|---|---|---|
| Oct 7 | Equipment | 6,000 | |
| Cash | 1,800 | ||
| Notes Payable | 4,200 |
(To record purchase of equipment, part cash and part note payable.)
Why: What did Marlow get? Equipment, an asset, for the full $6,000, so debit. What did it give up? Some cash right away, and a new promise to pay the rest later, a liability called Notes Payable. Two credits, one debit, still equal.
Earning revenue before the cash arrives¶
Every one of Marlow's transactions asks the same two questions: what did the company get, and what did it give up? Then: which type of account is each side, asset, liability, equity, revenue, or expense, and which side does that account's normal balance put it on? On October 15, Marlow provides $2,300 of landscaping services to Kestrel Dental on account.
Oct 15: Services provided on account
| Date | Account | Debit | Credit |
|---|---|---|---|
| Oct 15 | Accounts Receivable | 2,300 | |
| Service Revenue | 2,300 |
(To record services provided on account.)
Why: What did Marlow get? A customer's promise to pay later, Accounts Receivable, an asset, so debit. What did it give up? The work itself, already performed, so revenue is earned right now: Service Revenue, credit, even though no cash has changed hands yet.
Cash before the work: prepayments and deferred revenue¶
Cash can move before either side of a deal is finished, and the journal entry depends on which direction it's moving. Section 02 showed one direction with Brightline Cleaning's prepaid rent: cash goes out for a future benefit, so it buys an asset, not an expense. The same rule applies to any prepayment. Suppose a company pays $3,000 cash today for a year of insurance coverage starting today.
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | 3,000 | |
| Cash | 3,000 |
None of the coverage has been used yet, so nothing is Insurance Expense yet.
Common mistake: paying cash always creates an expense
Paying cash doesn't automatically mean an expense. If what you bought will be used up later, it's an asset now (a prepayment). Only the portion used up each period becomes an expense, recorded in Chapter 3.
On October 17, cash moves the other way: the Alvarez family pays Marlow $2,500 in advance for landscaping work Marlow hasn't done yet.
Oct 17: Cash collected before the work is done
| Date | Account | Debit | Credit |
|---|---|---|---|
| Oct 17 | Cash | 2,500 | |
| Deferred Revenue | 2,500 |
(To record cash received in advance for services to be provided next month.)
Why: What did Marlow get? Cash, so debit. What did it give up? A promise to do the work next month, a liability called Deferred Revenue (some people still call it unearned revenue), so credit. The cash arrived before the service, so it isn't revenue yet.
Common mistake: cash in the door means revenue earned
Cash in the door doesn't automatically mean revenue. Revenue is recorded when the service is provided, not when the cash shows up. Money collected in advance is a liability, Deferred Revenue, until Marlow actually does the work.
An expense before the cash goes out¶
Timing runs the other way too: an expense can be incurred before it's paid. On October 26, Marlow receives a $400 utility bill for the month, but doesn't pay it right away.
Oct 26: An expense incurred but not yet paid
| Date | Account | Debit | Credit |
|---|---|---|---|
| Oct 26 | Utilities Expense | 400 | |
| Utilities Payable | 400 |
(To record a utility bill received but not yet paid.)
Why: What did Marlow use up? A month of electricity, so the expense is recorded now, the moment it's incurred. What did it give up? Not cash yet, just a promise to pay, so the credit goes to a liability, Utilities Payable, instead of Cash.
Common mistake: an expense isn't recorded until it's paid
The expense is recorded when it's incurred, not when the cash goes out. If the bill is unpaid at the time you record it, the credit lands on a payable instead of Cash; either way, the expense and the total on the books move together.
Once every transaction for the month is sitting in the journal in this format, the next job is moving each debit and credit into its own account so you can see running balances. That's posting, coming up next.
Pause and work¶
Start by watching a full month of Marlow Landscaping's entries worked out step by step. Then fill in just the credit side of a new company's entries yourself. Finally, build a whole month of journal entries from scratch, with new numbers every time you ask for them.