How to Record Journal Entries in Accounting

In a previous discussion, we explored the classification of journals into several categories. Recording journal entries in accounting refers to the process of documenting transactions within these specific categories.

Here are the steps involved in recording journal entries in accounting

Step 1: Understand the Business Transaction

Start by understanding the nature of the business transaction and how it impacts the business and its accounting records.

Step 2: Identify the Accounts

Identify the accounts affected by the transaction.

Step 3: Recognize the Accounting Group and Type of Accounts

Determine the accounting group (e.g., Assets, Liability, Capital, Revenue, and Expenses) and the type of affected accounts (e.g., Personal, Real, and Nominal) to apply the correct rules.

Step 4: Apply the Golden Rules of Accounting

Before recording the entry, apply the golden rules of accounting, which depend on the type of account involved.

(For more details on account groups, account types, and golden rules, read our article on Types of Accounts and Rules for Making Accounting Entries.)

Here are the golden rules for recording transactions:

Personal Accounts	Debit: The receiver Credit: The giver
Real Accounts	Debit: What comes in Credit: What goes out
Nominal Accounts	Debit: All expenses and losses Credit: All incomes and gains

For beginners, applying the golden rules can sometimes be challenging, especially with compound and adjusting entries. In such cases, the rules of debit and credit provide a more accurate guide than the golden rules.

(For further information, read our article on Accounting Rules for Debits and Credits).

Here are the rules for debits and credits:

Assets and Expenses Accounts	Debit: When there is an increase Credit: When there is a decrease
Liability, Capital, and Revenue Accounts	Debit: When there is a decrease Credit: When there is an increase

Step 5: Posting the entries in a Journal

Now, record the journal entry in the journal, accompanied by a brief explanation or narration of the transaction.

Example of Recording a Journal Entry

Let's understand the process of recording a journal entry with the following example:

Example: Goods worth ₹20,000 were purchased for stock-in-trade for a shop, and payment was made in cash.

Step 1: Understand the Business Transaction:

Goods worth ₹20,000 were purchased for stock-in-trade, which qualifies as a business transaction. The payment of ₹20,000 was made in cash.

Step 2: Identify the Accounts :

The two accounts affected by this transaction are:

• Purchases Account

• Cash Account

Step 3: Recognize the Accounting Group and Type of Accounts

Account Name (Ledger)	Account Group	Type of Account
Purchases A/c	Expenses	Nominal Account
Cash A/c	Assets	Real Account

Step 4: Apply the Golden Rules or Debit and Credit Rules:

Now, let’s determine the accounting entry by applying the golden rules and the rules for debits and credits:

• Purchases A/c: This is a nominal account representing an expense. According to the golden rule, all expenses and losses should be debited. Also, according to the debit and credit rule, expenses are debited when they increase.

• Cash A/c: This is a real account representing an asset. As per the golden rule, assets going out are credited. According to the debit and credit rule, assets are credited when they decrease.

In this case, as goods are purchased, the Purchases Account (an expense) is increasing, so it will be debited. The Cash Account (an asset) is decreasing due to the payment, so it will be credited.

Here’s how the accounting entry will look:

• Purchase A/c – Nominal Account (Expense) – Debit: All expenses and losses, or when there is an increase

• Cash A/c – Real Account (Asset) – Credit: What goes out, or when there is a decrease

  
  

Accounting Entry:

Purchases A/c  ............. Dr. ₹20,000 

        To Cash A/c            ₹20,000 

(Being purchase of goods for Cash against invoice no ….. dated……)

Step 5: Post the Journal Entry in the Journal:

Now, the journal entry will be recorded in the journal, accompanied by a brief explanation or narration. The corresponding amounts will be entered in the debit and credit columns. After completing this entry, a horizontal line will be drawn before entering the next transaction.

The transaction in the example will be Journalised in the following manner:

Recording journal entries in accounting means understanding the transaction, identifying the accounts involved, applying the right debit and credit rules, and posting the entry with a brief explanation.

Check out our next blog articles on Compound and Adjusting Entries in Journal.