Thirteen things happened to Northwind in September. Here is every one of them turned into an entry, with the reasoning that produced it.
The journal is the chronological record: what happened, in the order it happened, before anything is summarised. Every entry answers three questions — when, which accounts, and how much on each side — and carries a memo answering the fourth, which is why, for whoever reads it in eighteen months.
Here is all of September. Read them in order; the reasoning under each is the part worth slowing down for. Four of them are the ones people get wrong, and they are marked.
The founders pay $60,000 into the company's bank account for their shares.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 60,000.00 | |
| 3000Common stock | 60,000.00 | |
| Balanced | 60,000.00 | 60,000.00 |
Cash arrived, so cash is debited. It did not arrive from a customer and it is not a loan — the founders now hold a claim on the company, and that claim is equity.
Northwind buys a delivery van outright for $24,000.
| Account | Debit | Credit |
|---|---|---|
| 1500Vehicles | 24,000.00 | |
| 1000Cash — operating | 24,000.00 | |
| Balanced | 24,000.00 | 24,000.00 |
Cash left, but nothing was consumed — one asset became another. The van will be useful for four years, so charging all of it to September would make September wrong and the next 47 months wrong too.
Twelve months of insurance is paid up front: $7,200.
| Account | Debit | Credit |
|---|---|---|
| 1400Prepaid insurance | 7,200.00 | |
| 1000Cash — operating | 7,200.00 | |
| Balanced | 7,200.00 | 7,200.00 |
Paying early buys a year of cover, not a September expense. Until it is consumed it is an asset — a prepaid expense — and one twelfth of it becomes an expense each month.
$18,000 of stock arrives from a supplier, on 30-day terms.
| Account | Debit | Credit |
|---|---|---|
| 1300Inventory | 18,000.00 | |
| 2000Accounts payable | 18,000.00 | |
| Balanced | 18,000.00 | 18,000.00 |
No cash moved at all, and the entry still has to be made: Northwind now owns goods and owes money for them. This is the entry cash-basis bookkeeping cannot make.
A walk-in customer buys $9,500 of goods and pays on the spot.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 9,500.00 | |
| 4000Revenue | 9,500.00 | |
| Balanced | 9,500.00 | 9,500.00 |
The sale is recorded at the price agreed, not at what it cost. Cost is the other half of the sale, and it gets its own entry.
Those goods had cost Northwind $5,200.
| Account | Debit | Credit |
|---|---|---|
| 5000Cost of revenue | 5,200.00 | |
| 1300Inventory | 5,200.00 | |
| Balanced | 5,200.00 | 5,200.00 |
Inventory leaves the shelf and becomes a cost of the sale in the same period as the revenue it produced. That is the matching principle, in two lines.
A trade customer is invoiced $22,000, payable in 30 days.
| Account | Debit | Credit |
|---|---|---|
| 1200Accounts receivable | 22,000.00 | |
| 4000Revenue | 22,000.00 | |
| Balanced | 22,000.00 | 22,000.00 |
The goods are delivered, so the revenue is earned — in September, not in October when the money turns up. What is owed sits in accounts receivable.
Those goods had cost Northwind $11,800.
| Account | Debit | Credit |
|---|---|---|
| 5000Cost of revenue | 11,800.00 | |
| 1300Inventory | 11,800.00 | |
| Balanced | 11,800.00 | 11,800.00 |
Same pairing as JE-6. Every sale moves two things: a price out of revenue, and a cost out of inventory.
Northwind pays $12,000 against the supplier's bill.
| Account | Debit | Credit |
|---|---|---|
| 2000Accounts payable | 12,000.00 | |
| 1000Cash — operating | 12,000.00 | |
| Balanced | 12,000.00 | 12,000.00 |
Nothing was bought here and nothing was consumed. An obligation was settled: the liability goes down and so does cash. No expense appears, because the expense happened when the goods were sold.
The trade customer pays $14,000 of the September invoice.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 14,000.00 | |
| 1200Accounts receivable | 14,000.00 | |
| Balanced | 14,000.00 | 14,000.00 |
No revenue here either — that was recorded on the 15th. A receivable turns into cash, and the income statement never hears about it.
September payroll of $8,400 is paid. (Kept simple: no withholding or payroll taxes.)
| Account | Debit | Credit |
|---|---|---|
| 6000Payroll expense | 8,400.00 | |
| 1000Cash — operating | 8,400.00 | |
| Balanced | 8,400.00 | 8,400.00 |
Consumed in September, paid in September — the one case where cash and accrual agree, and the reason it is easy to believe they always do.
A customer pays a $3,000 deposit for goods to be delivered in October.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 3,000.00 | |
| 2400Deferred revenue | 3,000.00 | |
| Balanced | 3,000.00 | 3,000.00 |
Cash in the bank that is not revenue. Northwind owes goods, so the credit is a liability — deferred revenue — and it stays one until October's delivery earns it.
September rent of $2,000 is paid.
| Account | Debit | Credit |
|---|---|---|
| 6200Rent expense | 2,000.00 | |
| 1000Cash — operating | 2,000.00 | |
| Balanced | 2,000.00 | 2,000.00 |
Consumed and paid in the same month again. Note what is not here: no October rent, even if the landlord would take it early.
Two of those entries — JE-7's invoice and JE-12's deposit — are the whole of revenue recognition in miniature. The rule is not cash arrived, and it is not an invoice was issued: revenue is recognised when (or as) a performance obligation is satisfied, which is when control of the goods or services transfers to the customer. For a shop handing over tools, that is the moment of delivery.
Wrong
JE-12 · deposit
Right
JE-12 · Deposit from customer for tools to be delivered in October. Liability until delivery (ASC 606).
Ask what changed about the business, not what changed about the bank account. The entry follows from the answer.
Check yourself
A customer pays a $3,000 deposit on 26 September for tools to be delivered in October. What is September's entry?
Requirements, conventions and mechanics are three different things. These are the sources behind the requirements — and the ones marked as conventions are ours, not the standard-setters'.
The full map is in US GAAP, and where these rules come from.
Each links to its definition in the glossary, where it also states the authority behind it and the components that render it.
The ideas in this lesson, explained for the founder who runs the company. Each has its own entry in the founder glossary.