- Now that you've seen some examples of journal entries,
perhaps you're starting to see a pattern.
I want to share with you three simple questions
you can ask for every transaction.
If you get in the habit of asking these three questions,
the whole debits and credit thing gets a lot easier.
One, what accounts are involved?
Two, did the accounts increase or decrease?
And three, by how much did each account change?
The answer to question one
tells you if the accounts involved
are assets, liabilities, or owners equity accounts.
The answer to question two
considered in conjunction with the answer to question one
tells you if those accounts are to be debited or credited.
Consider the instance where $25,000 is borrowed from a bank.
The two accounts involved are cash and notes payable.
Cash increased,
and since cash is an asset
and assets increase with debits,
then cash must be debited.
Notes payable increased.
We owe more money,
and since notes payable is a liability
and liabilities increase with credits,
then notes payable must be credited.
Now, this three-step process will always work,
even for complex transactions.
Consider the case where inventory costing $60,000
is sold on account for $75,000.
Using the three-step process results in the following.
Question one, what accounts are involved?
Well, accounts receivable, that's an asset.
Inventory, that's also an asset.
Cost of goods sold, well,
that's an expense, part of owners equity,
and sales revenue, a revenue account,
also part of owners equity.
We've got our four accounts.
Question two, did the accounts increase or decrease?
Well, accounts receivable went up.
Customers owe us more money.
Since accounts receivable is an asset,
it's increased with a debit.
Now, to inventory.
That decreased.
We don't have it anymore.
Since inventory is an asset, it's decreased with a credit.
Now our third account, cost of goods sold.
That's increased.
That's an expense causing owners equity to go down.
Since owners equity decreases with a debit,
cost of goods sold must be debited.
Our fourth account, sales revenue,
well, sales revenue increased.
Remember, our revenue causes owners equity to go up.
Since owners equity increases with a credit,
sales revenue has to be credited.
All right, question three.
By how much did each account change?
The answer to question three combined with one and two
results in the following journal entry.
Now, this three-question process works every single time.
You just have to be systematic.
The same three questions asked consistently
for every transaction
will always ensure that debits equal credits
and as a result,
the accounting equation, yahoo, always balances.