- Okay, a simple illustration
will help reinforce what you've learned
about the relationship of assets, liabilities,
owner's equity, revenues, expenses, and dividends,
as well as the mechanics
of the double entry accounting system.
Catherine Coller established
the Double K Corporation in 2012.
The journal entries to record the transactions
of Double K Corporation are shown in the next section.
Note here that we've used letters
in place of dates.
Now, let's quickly walk through
each of these journal entries
and see if we can tell what they mean.
For entry a, cash is being increased.
But we know what that means,
because it's being debited.
And capital stock and equity account
is being increased as well.
It looks like capital stock was issued
in exchange for $20,000.
For entry b, inventory is being debited.
Since inventory is an asset
and assets increase with debits,
we must have purchased inventory.
And since cash, another asset, is being credited,
that means we must have paid for cash with that inventory.
We know we paid cash because assets go down with credits
and cash is an asset.
For entry c, cash is increasing.
We know that because an asset increases with a debit.
Now, how did we generate that cash?
Well, a liability, notes payable.
Notes payable is being credited here.
And we know that liabilities increase with credits.
That must mean that we borrowed money
and that we will have to someday pay it back,
hence the term liability.
Now, to entry d.
We have an asset, land, increasing,
and an asset, cash, decreasing.
It looks like we were trading one asset for another.
We debited land for $25,000
and we credited cash for $25,000.
Now, entry e actually involves two journal entries.
We are selling inventory costing $2,000 for $3,200.
That $3,200 will be collected in the future.
First, we record the increase in the accounts receivable
as a result of the sale.
Assets, in accounts receivable, increase with debits.
We debit the accounts receivable account
and we credit the sales revenue account.
We remember that sales revenue is a subaccount
of retained earnings, and retained earnings
increases with credits.
Now, the second journal entry
associated with the transaction, e,
records the reduction in our inventory
an asset, because the inventory was sold.
We debit the expense account,
cost of goods sold, to recognize the expense,
and we credit inventory to recognize the decrease
in our inventory account.
Now, entry f simply is recognizing
that the company spent cash
and incurred two different types of expenses.
Selling expenses and miscellaneous expenses.
Expenses are reductions in the retained earnings account,
and retained earnings goes down with debits.
Our cash account goes down with the credit.
Now, finally, with entry g,
we are collecting cash from those individuals
to whom we sold inventory in transaction e.
Those customers owed us $3,200
and the $3,200 was originally recorded
as an accounts receivable with a debit.
Those folks are now paying us.
In other words, once they make the payment,
they don't owe us anymore.
The accounts receivable account must be reduced,
and it is reduced with a credit.
Cash is then debited.
We are trading one asset for another
with this journal entry.
Hopefully you're starting to understand
how to read a journal entry.
With a little practice, you can see a journal entry
and figure out what the transaction was.
And then you can see a transaction
and figure out what the journal entry should be.
Now, like all new skills, it takes practice.
But hopefully you're starting to get comfortable
with the debits and the credits
of the accounting system.
Just hang in there!