How to record a journal entry the EASY way!

how to record a journal entry the easy way welcome to another video guys my name is Bill Hannah and this is the Financial Controller channel where I teach you tips and tricks to supercharge your accounting career I've been in the accounting game for over 15 years I started out as an auditor then I went to become a staff accountant senior and then manager and then our controller and the whole purpose of this channel is to give you the summary and the juice of my experience over the last 15 years so that you can apply it to your own career and learn from it so today we're talking about how to record a journal entry and journal entries are the building blocks of the financial statements as we all know business transactions gets recorded in the form of debits and credits as a journal entry that will go to a trial balance the purpose of which is to make sure that all of our debits and credits are equal and then from the trial balance we can summarize that into a financial statement which is a balance sheet to the income statement and the statement of cash flow and in this video I'm gonna show you the easiest way the simplest way to think through any journal entry and never forget it debits and credits and we'll begin by looking at why why we need debits and credits or journal entries in the first place if we really understand on a deep level why we need them we will truly never forget the method of how to record them so we'll look at why and then we'll look at three easy steps to record any journal entry if you follow these steps you'll you can think your way through any journal entry or business transaction and then we'll look at two real life examples so that we can practice what we learned today and so let's dive right in so first let's look into why why we need journal entries in the first place because we didn't always have them before the 15th century people recorded business transactions in terms of cash so in the past than before we invented debits and credits cash went up and cash went down and that was the really the only way to look at a performance of a business is looking at how much cash it has but then in the 15th century and particularly in Italy in Venice with the increase in Commerce and all of these Venetian merchants creating new types of businesses and trades increase in commerce forced some of the folks at that time and it was a priest with by the name of Luca Pacioli or Lucia but surely who was a very cool priest at a time who invented the concept of debits and credits and also because we had the concept of investors so people began to invest in other people businesses and so when you have an investor you're now having someone who wants to know how is the business doing aside from cash so an investor wants to know what kind of expenses you have what types of income streams you have and so an investor is concerned with much more than cash going up or down and so that would that made Lucia Pacioli that priest we talked about invent the concept of debit and credit and so the idea of debit and credit was the economic benefit meaning the increase of economic benefit at one place in the business and a decrease in another place an example of that would be if you buy inventory your inventory economic benefit will go up so they'll be debit and then credit will be to cash because you had to pay for it in cash and so it's kind of we have to record one side by debit one side by credit to represent today change an economic benefit in the business and that was as opposed to before it was only in cash cash going up and cash going down now with debit and credit we can record the inventory impact and the cash impact and that was the idea that we'll see a postulate came within the 15th century and it stayed with us until today and we practice it in the current time my first step in recording in a journal entry comes from the energy law that every action has an equal and opposite reaction and so for every business transaction and the example that I have here is a computer purchase whenever you have any action in the business there's a reaction so as long as you can think of it as an action or reaction this is the first step for you to record any journal entry the example here if you buy a computer then the action will be that you bought a computer that will increase your fixed asset in this case a computer and will decrease your cash so it's action and reaction and as long as you can think of it this way this is your first step and never forgetting how to record a journal entry now the second step for us to remember how to record our journal entries is remembering this chart here if we always remember this acronym Dealer de a le our dividends expenses assets liabilities equity is revenue dealer and easier to remember as long as you can have this handy whenever you're recording a journal entry you'll always remember what goes in the debit side and one goes in the credit side and now let's look at our first example so we can practice everything we talked about today the example here goes that we are buying office supplies for $100 and let's use here our chart that we learned today to record this business transaction if we have office supplies that we're buying for $100 and remember we said that journal entries will be action and reaction the action here is that we are buying office supplies we are increasing the office supplies what is the reaction to that the reaction threatens our production to cash right so if you buy office supplies that means went up and your cash will go down so to record that you have the assets here they always have a debit nature office supplies is an asset and the way to know whether anything is an asset or or not or an expense did in this case office supplies as an asset the definition of an asset is that it's a purchase that will have a future economic benefit are you gonna have a future economic benefit from office supplies I think the answer is yes when you get other supplies you keep it at the office and use it in the future and so office supplies is an asset that means we have to debit this asset office supplies because it has a debit nature here in this chart so debit to office supplies for a hundred and credit to in this case we remember action-reaction the action office supplies went up cash went down and cash is an asset if you want to decrease this asset what do you do to it if an asset has a debit nature what do you do to it to make it go down you credit that asset so credit to cash for $100 and this is super easy guys like always remember your acronym here dealer if you remember that and what has a debit nature and dealer what has a credit nature and remember that there's an action a reaction to every business transaction you can think your way through any journal entry and now let's talk about the second example okay so an example number two we paid salary for $1,000 and whenever we spend any cash we never pay any out of the business we either are making an expense incurring an expense or buying an asset in this case if you want to think your way through it if you are spending on salary is this an asset well the answer to that and as it will be an expenditure today that has a future economic benefit and spending on a salary doesn't necessarily have a future economic benefit you're paying for something that happened today an employee performed the service today and you're paying him the salary so this is an expense so an expense to record this transaction here and the debit side to increase an expense it has a debit nature so here that will be debit to salary expense for $1,000 and the credit in this case will be you obviously are spending the salary in cash and so a cash is also an asset that will go down and since assets also have a debit nature to decrease them you have to credit them so credit to cash so as you can see guys it's super simple if you can always remember your acronym dealer and you can think your way through any journal entry remember action equal reaction that's opposite in direction and you're accurately your acronym dealer here you can sync your way through any journal entry and my first step in recording any journal entry is to think through it and what I mean here is that it's okay for you to think through it I've been in accounting for fifteen years and until today I'm presented with business transactions that I need to think through the journal entry so it's okay for you not to remember every single journal entry and scenario to record a journal entry it's important for you to know that you can sync through it and you can look it up online google it find the answer you don't have to know all the answers immediately on the spot if you're talking to someone about a business transaction and how to record it or in a job interview it's okay for you to get a pen and paper and draw it out and just look at it visualize it think through it and this is my third step in recording any journal entry if you enjoyed this video and you like something new please give a thumbs up and share this video with someone else that might benefit from it and don't forget to subscribe to our channel and hit the notification bill so that you don't miss out on any of the videos that I put out weekly and I'll see you in the next video [Music] you

Channel: The Financial Controller

Views: 131,974

Keywords: journal entry, how to record a journal entry, debits and credits, accounting basics, accounting 101, financial accounting

Id: 8f-7mR5B2bU

Length: 9min 35sec (575 seconds)

Published: Fri Jun 05 2020