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The journal is the point of entry of business transactions into the accounting system. It is a

chronological record of the transactions, showing an explanation of each transaction, the

accounts affected, whether those accounts are increased or decreased, and by what amount.

A general journal entry takes the following form:

Date Name of account being debited Amount

Name of account being credited Amount

Optional: short description of transaction

Consider the following example that illustrates the basic concept of general journal entries.

Mike Peddler opens a bicycle repair shop. He leases shop space, purchases an initial inventory ofbike parts, and begins operations. Here are the general journal entries for the first month:

Date Account Names & Explanation Debit Credit

9/1 Cash 7500

Capital 7500

Owner contributes $7500 in cashto capitalize the business.

9/8 Bike Parts 2500

Accounts Payable 2500

Purchased $2500 in bike parts

on account, payable in 30 days.

9/15 Expenses 1000

Cash 1000

Paid first month's shop rent of $1000.

9/17 Cash 400

Accounts Receivable 700

Revenue 1100

Repaired bikes for $1100; collected $400

cash; billed customers for the balance.

9/18 Expenses 275

Bike Parts 275

$275 in bike parts was used.

9/25 Cash 425

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Accounts Receivable 425

Collected $425 from customer accounts.

9/28 Accounts Payable 500

Cash 500

Paid $500 to suppliers for partsurchased earlier in the month.

General Ledger

The general ledger is a collection of the firm's accounts. While the general journal is organized as a

chronological record of transactions, the ledger is organized by account. In casual use the accounts of

the general ledger often take the form of simple two-column T-accounts. In the formal records of the

company they may contain a third or fourth column to display the account balance after each posting.

Cash

Sep 1 7500

17 40025 425

Sep 15 1000

28 500

Bal. 6825

Accounts Receivable

Sep 17 700 Sep 25 425

Bal. 275

Parts Inventory

Sep 8 2500 Sep 18 275

Bal. 2225

Accounts Payable

Sep 28 500 Sep 8 2500

Bal. 2000

Capital

Sep 1 7500

Bal. 7500

Revenue

Sep 17 1100

Bal. 1100

ExpensesSep 15 1000

Sep 18 275

Bal. 1275

Trial Balance

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If the journal entries are error-free and were posted properly to the general ledger, the total of all of the

debit balances should equal the total of all of the credit balances. If the debits do not equal the credits,

then an error has occurred somewhere in the process. The total of the accounts on the debit and credit

side is referred to as the trial balance.

Once the account balances are known, the trial balance can be calculated as shown:

Account Title Debits Credits

Cash 6825

Accounts Receivable 275

Parts Inventory 2225

Accounts Payable 2000

Capital 7500

Revenue 1100

Expenses 1275

10600 10600