Analyzing transactions and recording them as journal entries is the first step in the accounting cycle. It begins at the start of an accounting period and continues during the whole period. Transaction analysis is a process which determines whether a particular business event has an economic effect on the assets, liabilities or equity of the business. It also involves ascertaining the magnitude of the transaction i.e. its currency value.
After analyzing transactions, accountants classify and record the events having economic effect via journal entries according to debit-credit rules. Frequent journal entries are usually recorded in specialized journals, for example, sales journal and purchases journal. The rest are recorded in a general journal.
The following example illustrates how to record journal entries:
Company A was incorporated on January 1, 2010 with an initial capital of 5,000 shares of common stock having $20 par value. During the first month of its operations, the company engaged in following transactions:
|Jan 2||An amount of $36,000 was paid as advance rent for three months.|
|Jan 3||Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining amount was recognized as a one year note payable with interest rate of 9%.|
|Jan 4||Purchased office supplies costing $17,600 on account.|
|Jan 13||Provided services to its customers and received $28,500 in cash.|
|Jan 13||Paid the accounts payable on the office supplies purchased on January 4.|
|Jan 14||Paid wages to its employees for first two weeks of January, aggregating $19,100.|
|Jan 18||Provided $54,100 worth of services to its customers. They paid $32,900 and promised to pay the remaining amount.|
|Jan 23||Received $15,300 from customers for the services provided on January 18.|
|Jan 25||Received $4,000 as an advance payment from customers.|
|Jan 26||Purchased office supplies costing $5,200 on account.|
|Jan 28||Paid wages to its employees for the third and fourth week of January: $19,100.|
|Jan 31||Paid $5,000 as dividends.|
|Jan 31||Received electricity bill of $2,470.|
|Jan 31||Received telephone bill of $1,494.|
|Jan 31||Miscellaneous expenses paid during the month totaled $3,470|
The following table shows the journal entries for the above events.
|Jan 2||Prepaid Rent||36,000|
|Jan 4||Office Supplies||17,600|
|Jan 13||Accounts Payable||17,600|
|Jan 14||Wages Expense||19,100|
|Jan 26||Office Supplies||5,200|
|Jan 28||Wages Expense||19,100|
|Jan 31||Electricity Expense||2,470|
|Jan 31||Telephone Expense||1,494|
|Jan 31||Miscellaneous Expense||3,470|
At the end of the period, all the journal for the period are posted to the ledger accounts.
Written by Irfanullah Jan