Chapter 4
The Accounting Cycle: Journals and Ledgers
84
Using the steps illustrated above on these transactions, we can create a table to determine which
accounts will be debited and credited.The table for the nine transactions are shown in Figure 4.5.
Account Name
Category Increase or
Decrease
Debit or
Credit
1
Cash
Service Revenue
Asset
Revenue
Increase
Increase
Debit
Credit
2
Advertising Expense
Accounts Payable
Expense
Liability
Increase
Increase
Debit
Credit
3
Cash
Unearned Revenue
Asset
Liability
Increase
Increase
Debit
Credit
4
Bank Loan
Cash
Liability
Asset
Decrease
Decrease
Debit
Credit
5
Prepaid Rent
Cash
Asset
Asset
Increase
Decrease
Debit
Credit
6
Furniture
Cash
Asset
Asset
Increase
Decrease
Debit
Credit
7
Accounts Receivable
Service Revenue
Asset
Revenue
Increase
Increase
Debit
Credit
8
Accounts Payable
Cash
Liability
Asset
Decrease
Decrease
Debit
Credit
9
Cash
Accounts Receivable
Asset
Asset
Increase
Decrease
Debit
Credit
________________
figure 4.5
Journalize the Transaction
Once the analysis is complete, the transaction must be recorded. The transaction will be recorded
in a
journal
, which is referred to as a book of original entry.The act of recording in the journal is
called
journalizing
.There are various journals available for a company to use, but at this point we
will focus solely on the
general journal
.
The journal lists all the transactions of the business in one place and in chronological order. Keeping
all transactions in one place makes them easier to follow and makes it easier to trace any mistakes,
compared to only recording them in T-accounts.
As an example, consider a business called MP Consulting, owned by Mark Parish. Mark
runs the business as a sole proprietorship and provides financial consulting to his clients.
On January 2, 2016 he completed some work for a client and the client paid $1,500 cash.
Our analysis indicates that cash should be debited and service revenue should be credited.
Figure 4.6 on the next page shows how this would be recorded in the journal.The circled numbers
explain how to properly create a journal entry.
