Journal entries
Journal entries, worked through
Each page takes one transaction and books it: the entry, the entries that follow it until the balance is gone, and what the set does to every account. The figures are computed by the same tested functions as the accounting tools, and every entry is proved to balance before the page is built.
- Worked entries
- 36
- Basis
- Accrual, US GAAP
- Currency
- USD
Prepaids and deferrals
Cash paid before the cost is used, or received before revenue is earned.
- Prepaid insuranceWhen the premium is paid, debit Prepaid insurance and credit Cash. At each month-end, debit Insurance expense and credit Prepaid insurance for the month's share of the policy, until the prepaid balance reaches zero.
- Prepaid rentWhen rent is paid in advance, debit Prepaid rent and credit Cash. At each month-end, debit Rent expense and credit Prepaid rent for the month the space was used.
- Prepaid software subscriptionWhen an annual software subscription is paid up front, debit Prepaid software and credit Cash (or Accounts payable). Each month-end, debit Software expense and credit Prepaid software for the days of service used that month.
Accruals
Costs and income that belong to a month before any document arrives.
- Accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.
- Accrued wagesAt month-end, debit Wages and salaries and credit Accrued wages for the days worked since the last payday. On payday, reverse the accrual or debit Accrued wages for the part of the payroll it covers.
- Accrued interestAt month-end, debit Interest expense and credit Accrued interest for the interest earned by the lender since the last payment. When the payment is made, debit Accrued interest and credit Cash.
Revenue and receivables
Sales, collections, refunds, processors and credit losses.
- Deferred revenueWhen an annual contract is invoiced up front, debit Accounts receivable and credit Deferred revenue. As each month of service is delivered, debit Deferred revenue and credit Revenue for that month's share.
- Customer depositWhen a customer pays a deposit, debit Cash and credit Customer deposits. On delivery, debit Customer deposits for the deposit, debit Accounts receivable for the balance, and credit Revenue for the full price.
- Bundled contract (ASC 606)For a contract with several promises, debit Accounts receivable and credit Deferred revenue for the price when billed, allocate the price to each performance obligation by relative standalone selling price, and credit Revenue for each part as that promise is satisfied.
- Accrued revenueAt month-end, debit Unbilled receivables and credit Revenue for work delivered but not yet invoiced. When the invoice goes out, debit Accounts receivable and credit Unbilled receivables.
- Sale on accountFor a sale on credit, debit Accounts receivable and credit Revenue for the price; under a perpetual inventory system also debit Cost of goods sold and credit Inventory for what the goods cost. When the customer pays, debit Cash and credit Accounts receivable.
- Sales tax collectedWhen a taxable sale is made, debit Cash or Accounts receivable for the total charged, credit Revenue for the price and credit Sales tax payable for the tax. When the return is filed, debit Sales tax payable and credit Cash.
- Stripe payoutBook charges gross: debit Stripe clearing and credit Revenue for every charge, debit Sales returns and allowances and credit Stripe clearing for refunds. When the payout lands, debit Cash for the payout and Merchant fees for the fees, and credit Stripe clearing — which should then be zero.
- Customer refundTo refund a customer for an invoice already paid, issue a credit note — debit Sales returns and allowances, credit Accounts receivable — then pay the refund: debit Accounts receivable, credit Cash.
- Bad debt expenseUnder the allowance method, at each period-end debit Credit loss expense (bad debt expense) and credit Allowance for credit losses for the amount needed to bring the allowance to the expected loss on open receivables.
- Write-off of accounts receivableTo write off an uncollectible invoice under the allowance method, debit Allowance for credit losses and credit Accounts receivable. If the customer later pays, reinstate the receivable (debit Accounts receivable, credit Allowance) and record the cash.
Payables and spend
Bills, card spend, inventory and the discounts for paying early.
- Accounts payableWhen an approved vendor bill is entered, debit the expense or asset it bought and credit Accounts payable. When it is paid, debit Accounts payable and credit Cash.
- Inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- Credit card expensesFor each company card charge, debit the expense it paid for and credit Credit card payable. When the statement is paid, debit Credit card payable and credit Cash.
- Inventory write-downWhen inventory's net realizable value falls below its cost, debit an inventory write-down expense (often within cost of goods sold) and credit Inventory for the difference.
Fixed assets and leases
Capitalizing, depreciating, disposing — and leases under ASC 842.
- Equipment purchaseWhen equipment is bought, debit the fixed asset account for its full cost — price plus delivery and installation — and credit Cash or Accounts payable. Nothing is expensed on the day of purchase; the cost reaches the P&L as depreciation.
- DepreciationEach period, debit Depreciation expense and credit Accumulated depreciation for the period's charge. The asset account keeps its original cost; accumulated depreciation, a contra-asset, grows until net book value reaches salvage value.
- Asset disposalWhen a fixed asset is sold, debit Cash for the proceeds and Accumulated depreciation for its balance, credit the asset for its original cost, and book the difference as a gain (credit) or a loss (debit) on sale.
- Capitalized softwareCapitalize qualifying development cost by debiting Capitalized software and crediting the expense it was first booked to (usually wages). Once the software is ready for use, debit Amortization expense and credit Accumulated amortization each month over its useful life.
- Operating lease (ASC 842)At commencement, debit Right-of-use asset and credit Lease liability for the present value of the payments. Each payment debits Lease liability and credits Cash; each month-end debits Operating lease cost for the straight-line cost and credits Lease liability for the interest and the right-of-use asset for the rest.
- Finance lease (ASC 842)At commencement, debit Right-of-use asset and credit Lease liability for the present value of the payments. Each payment debits Lease liability and credits Cash; each month-end debits Interest expense and credits Lease liability for the interest, and debits Amortization expense and credits the right-of-use asset for straight-line amortization.
Payroll and compensation
Wages, withholding, employer taxes and equity pay.
- PayrollOn payday, debit Wages and salaries for gross pay, credit Cash for net pay and credit liabilities for everything withheld. Book the employer's own taxes separately — debit Payroll tax expense, credit Payroll taxes payable — and clear both payables when they are remitted.
- Stock-based compensationEach month of the service period, debit Stock-based compensation expense and credit Additional paid-in capital for the grant-date fair value of the awards divided over the vesting period. No cash moves and no liability is created for equity-classified awards.
Financing and equity
Loans, shares, dividends and owners' money.
- Loan repaymentWhen the loan is received, debit Cash and credit Loan payable. Each payment debits Interest expense for the interest portion and Loan payable for the principal portion, and credits Cash for the full payment.
- Issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- DividendsWhen dividends are declared, debit Dividends declared (or Retained earnings) and credit Dividends payable. When paid, debit Dividends payable and credit Cash. At year-end, close Dividends declared to Retained earnings.
- Owner's drawFor a sole proprietorship or partnership, debit Owner's drawings and credit Cash when the owner takes money out. At year-end, close drawings to capital: debit Owner's capital, credit Owner's drawings. A contribution is the reverse: debit Cash, credit Owner's capital.
Income tax
Current and deferred income tax under ASC 740.
Foreign currency
Foreign-currency receivables, realized and remeasured.
- Realized FX gain or lossBook a foreign-currency invoice at the rate on the invoice date. When it is collected at a different rate, debit Cash for the dollars received, credit Accounts receivable for the dollars originally booked, and book the difference as a realized foreign exchange gain or loss.
- Unrealized FX revaluationAt each month-end, remeasure open foreign-currency receivables and payables at the closing rate: debit the receivable and credit Foreign exchange gain when the dollar value has risen, or the reverse for a loss. The gain is unrealized until the item settles.
The close
Taking the year's result to retained earnings.
Keep going
Where the entries come from and where they go.
- Journal entry balancerPaste an entry and check that debits equal credits, line by line.Tool
- Accounting, 0 to 1Thirteen lessons from what a debit is to a signed set of statements, on one company's month.Doc
- Commonly confused termsAccounting terms that get confused, side by side.Compare
- JournalEntryDebit and credit as two columns, never one signed number.Component