Free samples or donations made to charity are treated as an advertising expense by the business. Drawings are personal withdrawals made by the owner and act as a reduction in the owner’s capital. All transactions are assumed and simplified for illustration purposes. Here’s everything you need to know about this essential building block of bookkeeping, including what they are, why they’re important, and how to make them. Journal entries are indispensable to maintaining financial coherence and enabling accurate financial reporting. Pen World Ltd. has the following transactions during the month of Feb-2019.

Examples of Journal Entries

• A Journal is a book in which all the transactions of a business are recorded for the first time.
• For big industries like trading or manufacturing, other journals, called special journals are necessary.
• Businesses purchase life insurance for their employees too.
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• Small Finance International Ltd was incorporated in April 2019 with the capital initially of 10,000 common stocks of $ 10 each.
• Each entry must balance, with the total of the debit amounts equaling the credit amounts.

When we pay expenses that means our expenses have increased. Also, when we pay expenses, our bank account is obviously going to go down. Credit accounts are those account which decreases when there are transactions. It is also known as var or als account which means always credit account because it always reduces when there are transactions relating to that accounts. Debit accounts are those account which increases when there are transactions. It is also known as var or als account which means always debit account, because it always increases when there are transactions relating to that accounts.

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On the other hand, the ledger, also known as the principal book, is a set of accounts in which the financial information in the journals is summarized and posted. As per the rule, we will credit the account when the asset decreases and debit the account when the expense sales journal increases. Have a go at writing journal entries for the transactions we’ve had in the previous lessons. So, in summary, we need to record a transaction that will increase expenses and decrease bank. Journal entries are used to record business transactions and events.

Final Thoughts on Journal Entries in Accounting

For additional practice in preparing journal entries, here are some more examples of business transactions along with explanations on how their journal entries are prepared. You don’t need to include the account that funded the purchase or where the sale was deposited. Made at the beginning of the new accounting period, reversing entries negate specific adjusting entries made in the previous period. Once dividends are paid, this is a debit to the dividends payable account and a credit to the cash account. When dividends are declared, the retained earnings account is debited, and the dividends payable account is credited. For depreciation expense, depreciation expense is debited, and the accumulated depreciation account is credited.

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Example #2 – Expense

to understand.