Accounts and Journals
🎯 Learning Objectives
- Understand the analogy between The Diary (Journal) and The Buckets (Ledger)
- Explain the Chart of Accounts (COA) and its role in organizing financial information
- Apply the process of recording transactions from source documents to journal entries
- Master the posting process that transfers journal entries to ledger accounts
- Identify key types of source documents used in accounting
📚 Background & Principles
Accounting relies on two fundamental record-keeping systems that work together systematically.
A chronological record of all business transactions. Each entry includes date, accounts affected, amounts, and explanation of the event.
Chronological: Records events in the order they occurA collection of all account balances. Each account shows cumulative debits and credits, organized by category. The ledger provides the current balance for each account.
Categorized: Similar transactions are grouped togetherPaper evidence that supports accounting entries. Examples: checks, invoices, sales receipts, purchase orders.
Verifiable: Creates an audit trail and supports each entryEvery transaction must be supported by appropriate source documents. This ensures accuracy, prevents fraud, and creates a reliable audit trail for financial review.
🔑 Key Concepts
A master list of all account types used by a business. Each account has a unique ID number and name for easy identification.
Assets (100s), Liabilities (200s), Equity (300s), Revenues (400s), Expenses (500s-600s). Numbers indicate account category.
Every transaction affects at least two accounts with equal debits and credits. This is foundation of accurate accounting.
🎨 Visual: The Accounting Record-Keeping Flow
Watch how information flows from source documents through the accounting system:
Source Documents
Receipts, Invoices, Checks
General Journal
Debits & Credits
General Ledger
Running Balances
Financial Statements
Reports
🎯 Interactive Exercise: Matching Source Documents to Accounts
Match each source document with the accounts it would affect:
Document 1: A sales receipt for $500 cash received from customer
Document 2: An invoice for office supplies costing $200, purchased on credit
Document 3: A check written to pay $1,000 rent for the month
Document 4: Purchase order for $5,000 computer equipment
📋 Common Source Documents
Different types of transactions are supported by different source documents:
| Document Type | Example | Accounts Affected | Direction |
|---|---|---|---|
| Sales Invoice | Bill sent to customer for goods/services | Accounts Receivable, Revenue | Asset ↑, Equity ↑ |
| Purchase Invoice | Bill received from supplier | Supplies/Equipment, Accounts Payable | Asset ↑, Liability ↑ |
| Check | Payment to creditor/employee | Cash, Liability/Expense | Asset ↓, Liability ↓ or Equity ↓ |
| Receipt | Cash received from customer | Cash, Accounts Receivable | Asset ↑, Asset ↓ |
| Purchase Order | Order placed for goods | No entry (promise to buy) | Until goods received |
🔍 Deep Dive
Explore accounting record-keeping at different levels of depth:
🟢 Foundational Level
Basic understanding of how to record transactions using accounts and journals.
Example: Simple Cash Transaction
Scenario: You receive $1,000 cash from a customer for services.
Cash increased, Services revenue earned
Debit Cash, Credit Services Revenue
Debit Cash $1,000 / Credit Services Revenue $1,000
🟡 Standard Level
Complete journal entries with proper formatting and posting process.
Example: Purchase on Credit
Scenario: Buy equipment for $5,000 on credit from a supplier.
Equipment (Asset) increases, Accounts Payable (Liability) increases
Asset accounts increase with debit, liability accounts increase with credit
Assets $5,000 = Liabilities $5,000 + Equity $0 ✓
🔴 Advanced Level
Complex transactions requiring multiple accounts and careful analysis of timing.
Example: Compound Transaction with Multiple Steps
Scenario: A company provides consulting services for $3,000. Customer pays $500 immediately and agrees to pay remaining $2,500 in 60 days.
Total revenue = $3,000 (service fully performed under accrual accounting)
Cash received = $500 (immediate payment)
Accounts Receivable = $2,500 (amount owed by customer)
Cash (Asset) increases by $500 → Debit
Accounts Receivable (Asset) increases by $2,500 → Debit
Services Revenue (Equity) increases by $3,000 → Credit
Total Debits: $500 (Cash) + $2,500 (A/R) = $3,000
Total Credits: $3,000 (Revenue)
✓ Entry is balanced: Debits = Credits
Advanced Example: Multi-Account Purchase
Scenario: Purchase equipment for $15,000: pay $5,000 cash now and finance remaining $10,000 with a note payable.
Equipment (Asset) increases by $15,000
Cash (Asset) decreases by $5,000
Notes Payable (Liability) increases by $10,000
Debit Equipment $15,000 (Asset increase)
Credit Cash $5,000 (Asset decrease)
Credit Notes Payable $10,000 (Liability increase)
Assets: +$15,000 (Equipment) - $5,000 (Cash) = +$10,000
Liabilities: +$10,000 (Notes Payable)
Equity: No change
✓ Equation balances: Assets ↑ = Liabilities ↑
Debit Cash $1,000 / Credit Unearned Revenue $1,000
Debit Unearned Revenue $1,000 / Credit Accounts Receivable $1,000 (reduce liability)
🎮 Interactive T-Account Simulator
Practice recording transactions by entering debits and credits. Watch the balance update in real-time:
⚖️ Balance Verification
📝 Worked Examples
Practice step-by-step transaction recording:
Example 1: Service Revenue Recorded
Scenario: FastForward provides consulting services for $2,500 and receives cash immediately.
Cash is received (asset increases), Revenue is earned (equity increases)
Cash (Asset) - increases with debit
Consulting Revenue (Equity) - increases with credit
General Journal
Dr. Cash $2,500 | Cr. Consulting Revenue $2,500
"To record consulting services provided for cash"
Example 2: Purchase on Credit
Scenario: FastForward purchases office equipment for $3,200 on credit from Office Supplies Inc.
Equipment is acquired (asset increases), Amount is owed (liability increases)
Equipment (Asset) - increases with debit
Accounts Payable (Liability) - increases with credit
General Journal
Dr. Equipment $3,200 | Cr. Accounts Payable $3,200
"To record equipment purchased on credit"
Example 3: Payment of Expense
Scenario: FastForward pays $800 rent for the current month.
Cash is paid (asset decreases), Rent expense is incurred (equity decreases)
Rent Expense (Equity) - increases with debit (reduces equity)
Cash (Asset) - decreases with credit
General Journal
Dr. Rent Expense $800 | Cr. Cash $800
"To record rent payment for current month"
🚫 Common Misconceptions & Professional Tips
✅ Reality: The direction of debit or credit depends on the account type. For assets and expenses, debits increase them. For liabilities, equity, and revenues, credits increase them.
✅ Reality: In a standard journal entry, you must have at least one debit AND at least one credit. The total debits must equal total credits, but the individual count can vary.
✅ Reality: The ledger is essential for calculating balances and preparing financial statements. It provides organized, summarized data that the journal alone cannot efficiently deliver.
🧠 Memory Aids & Quick Reference
1. Source Document → 2. Identify Transaction → 3. Record in Journal → 4. Post to Ledger
Chronological record of all transactions with dates and explanations.
Categorized collection of T-accounts showing cumulative balances.
Paper evidence supporting each accounting entry and transaction.
📖 Further Reading
The complete process of identifying, recording, and reporting business transactions from source documents through financial statements.
Subsidiary journals for high-volume transaction types like sales, purchases, cash receipts, and cash payments.
Detailed ledgers supporting control accounts (e.g., Accounts Receivable subsidiary showing each customer's balance).
A report listing all account balances to verify that total debits equal total credits before preparing financial statements.
📖 Glossary
Economic resources controlled by a business (assets) or claims on those resources (liabilities, equity).
A systematic list of all account types used by a business, each with a unique ID number for organization and reference.
The initial book of entry where all transactions are recorded chronologically before being posted to the ledger.
A book or system that contains all the individual T-accounts, showing the running balance for each account as debits and credits are posted.
The process of transferring transaction data from the journal to the appropriate ledger accounts, updating account balances.
An accounting system based on the principle that every transaction has equal debits and credits, ensuring the accounting equation always balances.
🎯 Final Knowledge Check
Test your understanding of Accounts and Journals:
Question 1: You receive $5,000 cash from a customer for services. Which accounts are affected?
Question 2: You buy equipment for $3,000 on credit from a supplier. What is the journal entry?
Question 3: What is the purpose of the ledger?