Journal Entries — Step by Step
A journal records business transactions in chronological order using Debit and Credit. The purpose is not to memorize entries. First understand what happened, identify every affected account, classify the accounts, apply the correct rule, determine the amount and then write an equal Debit and Credit entry.
Accounting Logic: Transaction → Accounts → Type → Rule → Amount → Journal Entry.
This lesson follows the ACCOUNTING LOGIC SYSTEM™ and is designed for beginners studying proprietorship accounting.
What You Will Learn
- How to identify the accounts affected by a transaction.
- How to decide which account is debited and which account is credited.
- How to write single and compound journal entries.
- How to check that total Debit equals total Credit.
- How journal entries move to the Ledger in the next stage.
Journal Entry Format
| Date | Particulars | L.F. | Debit Rs. | Credit Rs. |
|---|---|---|---|---|
| Year-Month-Date | Account to be debited A/c Dr. To Account to be credited A/c (Narration) |
Amount | Amount |
The debited account is written first with “Dr.” The credited account is written on the next line after “To”. A short narration explains the transaction. L.F. means Ledger Folio and is used as a cross-reference after posting.
The Six-Step Logical Journal Process
- Understand the transaction: State clearly what happened in the business.
- Identify the affected accounts: Every transaction affects at least two separate accounts.
- Classify each account: Decide whether it is Personal, Real or Nominal. Review Types of Accounts if needed.
- Identify the opposite effects: Ask who received or gave, which property came in or went out, or which expense, loss, income or gain arose.
- Apply the appropriate rule: Decide the Debit and Credit sides logically.
- Write and check the entry: Enter the date, particulars and amounts, then confirm that total Debit equals total Credit.
Modified Rules Used in This System
| Account type | Debit | Credit |
|---|---|---|
| Personal Accounts | Receiver / receivable from them | Giver / payable to them |
| Real Accounts | When property comes in / value increases | When property goes out / value decreases |
| Nominal Accounts | All expenses and losses | All income and gains |
Important: Cash is a Real Account because money is business property. Under this system, goods accounts such as Purchases, Sales, Purchase Return, Sales Return, Opening Stock, Closing Stock and Goods Destroyed are treated as Real Accounts. Read the complete Modified Golden Rules of Accounting before attempting difficult entries.
Worked Illustration 1 — Capital Introduced in Cash
Transaction: On 2026-April-01, the proprietor started the business with cash of Rs.50,000.
| Account | Type | Effect and rule | Decision |
|---|---|---|---|
| Cash A/c | Real | Cash comes into the business; property increases. | Debit |
| Capital A/c | Personal | The proprietor gives capital to the business. | Credit |
Journal Entry:
Cash A/c Dr. Rs.50,000
To Capital A/c Rs.50,000
(Being cash introduced by the proprietor as capital.)
Worked Illustration 2 — Goods Purchased for Cash
Transaction: On 2026-April-02, goods were purchased for cash for Rs.10,000.
| Account | Type | Effect and rule | Decision |
|---|---|---|---|
| Purchases A/c | Real | Goods come in; business property increases. | Debit |
| Cash A/c | Real | Cash goes out; business property decreases. | Credit |
Journal Entry:
Purchases A/c Dr. Rs.10,000
To Cash A/c Rs.10,000
(Being goods purchased for cash.)
Worked Illustration 3 — Goods Purchased on Credit
Transaction: On 2026-April-03, goods were purchased from Ayaan on credit for Rs.20,000.
| Account | Type | Effect and rule | Decision |
|---|---|---|---|
| Purchases A/c | Real | Goods come in; business property increases. | Debit |
| Ayaan A/c | Personal | Ayaan is the giver and the amount is payable to him. | Credit |
Journal Entry:
Purchases A/c Dr. Rs.20,000
To Ayaan A/c Rs.20,000
(Being goods purchased on credit from Ayaan.)
Worked Illustration 4 — One Debit and Two Credits
Transaction: On 2026-April-05, the business received Rs.15,000 in cash, consisting of cash sales of Rs.12,000 and commission received of Rs.3,000.
| Account | Type | Reason | Amount |
|---|---|---|---|
| Cash A/c | Real | Cash comes in; Debit. | Rs.15,000 |
| Sales A/c | Real | Goods go out through sale; Credit. | Rs.12,000 |
| Commission Received A/c | Nominal | Income arises; Credit. | Rs.3,000 |
Journal Entry:
Cash A/c Dr. Rs.15,000
To Sales A/c Rs.12,000
To Commission Received A/c Rs.3,000
(Being cash sales and commission received.)
Total Debit is Rs.15,000 and total Credit is Rs.15,000.
Worked Illustration 5 — Two Debits and One Credit
Transaction: On 2026-April-07, furniture costing Rs.20,000 and goods costing Rs.10,000 were purchased for cash.
| Account | Effect | Decision | Amount |
|---|---|---|---|
| Furniture A/c | Furniture comes in; property increases. | Debit | Rs.20,000 |
| Purchases A/c | Goods come in; property increases. | Debit | Rs.10,000 |
| Cash A/c | Cash goes out; property decreases. | Credit | Rs.30,000 |
Journal Entry:
Furniture A/c Dr. Rs.20,000
Purchases A/c Dr. Rs.10,000
To Cash A/c Rs.30,000
(Being furniture and goods purchased for cash.)
Common Journal Entry Mistakes
| Mistake | Correction |
|---|---|
| Starting with a memorized entry | Identify the transaction, accounts, types and rules first. |
| Recording one account twice | Name every separate account affected by the transaction. |
| Assuming Debit means loss and Credit means profit | Debit and Credit are accounting sides; the account type and rule determine their use. |
| Combining multiple amounts without naming accounts | Show every debit and credit account separately in a compound entry. |
| Unequal totals | Add all Debit amounts and all Credit amounts before accepting the entry. |
| Confusing Purchases with an asset such as furniture | Use Purchases A/c only for goods acquired for resale; record business-use property in its own asset account. |
Practice Exercise
Apply the six-step process and write the Journal Entry for each transaction.
- Started business with cash Rs.80,000.
- Purchased machinery for cash Rs.25,000.
- Purchased goods from Neha on credit Rs.18,000.
- Sold goods to Kabir on credit Rs.12,000.
- Paid salary in cash Rs.5,000.
- Received commission in cash Rs.3,000.
- Paid Neha Rs.8,000.
- Received Rs.7,000 in cash from Kabir.
Answer Key
| No. | Debit account | Credit account | Amount |
|---|---|---|---|
| 1 | Cash A/c | Capital A/c | Rs.80,000 |
| 2 | Machinery A/c | Cash A/c | Rs.25,000 |
| 3 | Purchases A/c | Neha A/c | Rs.18,000 |
| 4 | Kabir A/c | Sales A/c | Rs.12,000 |
| 5 | Salary A/c | Cash A/c | Rs.5,000 |
| 6 | Cash A/c | Commission Received A/c | Rs.3,000 |
| 7 | Neha A/c | Cash A/c | Rs.8,000 |
| 8 | Cash A/c | Kabir A/c | Rs.7,000 |
Before Moving to the Ledger
- Every affected account has been identified separately.
- Each account has been classified correctly.
- The Debit or Credit reason follows the appropriate modified rule.
- Total Debit equals total Credit.
- The date, amounts and narration are complete.
For more foundation, review Debit and Credit Explained Through Logic and How to Identify Business Transactions.
FAQ: Can one Journal Entry have three accounts?
Yes. A compound Journal Entry is used when one transaction affects more than two accounts, provided every affected account is shown separately and total Debit equals total Credit.
Example: A business owes a supplier ₹5,000. It pays ₹4,800 through Bank and receives ₹200 discount.
| Account | Debit ₹ | Credit ₹ |
|---|---|---|
| Supplier A/c | 5,000 | — |
| Bank A/c | — | 4,800 |
| Discount Received A/c | — | 200 |
| Total | 5,000 | 5,000 |
The Supplier liability decreases, so Supplier A/c is debited. Bank decreases and Discount Received is a gain, so both are credited. See the full Debit–Credit logic check, then verify how all three accounts are posted in the Compound Entry Ledger Check.
Next Lesson: Ledger Accounts and Posting Step by Step →
Continue with independent practice. Review the development status of reusable self-study worksheets, audited exercise-solution packs and institutional licensing on the Digital Resources and Institutional Licensing page. No paid live classes, workshops or one-to-one services are offered, and nothing is sold on this lesson page.
Worked Illustration: Cash Received from a Credit Customer
Question: Goods were sold on credit to Arjun for ₹20,000. Later, ₹12,000 cash was received from Arjun. Record both transactions and calculate the amount still receivable.
Step 1: Record the credit sale
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Arjun A/c Dr. | 20,000 | — |
| To Sales A/c | — | 20,000 |
| Being goods sold on credit to Arjun | — | — |
| Total | 20,000 | 20,000 |
Arjun is debited because ₹20,000 is now receivable from the customer. Sales is credited because the income is recognised when the credit sale occurs.
Step 2: Record the part payment
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash A/c Dr. | 12,000 | — |
| To Arjun A/c | — | 12,000 |
| Being cash received from Arjun against the outstanding amount | — | — |
| Total | 12,000 | 12,000 |
Cash increases, so Cash A/c is debited. The amount receivable from Arjun decreases, so Arjun A/c is credited. Sales is not credited again: collecting a receivable is not new income.
Customer ledger control
| Debit side | Amount (₹) | Credit side | Amount (₹) |
|---|---|---|---|
| To Sales A/c | 20,000 | By Cash A/c | 12,000 |
| — | — | By Balance c/d | 8,000 |
| Total | 20,000 | Total | 20,000 |
Closing receivable: ₹20,000 − ₹12,000 = ₹8,000 debit balance. After collection, the ₹20,000 asset consists of Cash ₹12,000 plus Accounts Receivable ₹8,000. Only the form of the asset changes.
Check your understanding
Neha owes ₹15,000 and pays ₹6,000 in cash. The entry is Cash A/c Dr. ₹6,000; To Neha A/c ₹6,000. The remaining receivable is ₹9,000 debit. Debit and credit are equal at ₹6,000.
Continue with Ledger Posting Step by Step, then verify balances through the Trial Balance lesson.
Worked Illustration: Machinery Cost, Installation and Part Payment
Question: On 10 April, machinery was purchased on credit from Orion Equipment for ₹60,000. On 11 April, ₹4,000 cash was paid for installation required to make the machinery ready for use. Later, ₹25,000 was paid to Orion. Record the entries and find the machinery cost and closing amount payable.
Entry 1: Machinery purchased on credit
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Machinery A/c Dr. | 60,000 | — |
| To Orion Equipment A/c | — | 60,000 |
| Being machinery purchased on credit | — | — |
| Total | 60,000 | 60,000 |
Machinery is business property that comes in, so Machinery A/c is debited. Orion is the supplier and ₹60,000 is payable, so Orion Equipment A/c is credited.
Entry 2: Installation cost capitalised
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Machinery A/c Dr. | 4,000 | — |
| To Cash A/c | — | 4,000 |
| Being installation cost paid and added to machinery cost | — | — |
| Total | 4,000 | 4,000 |
The installation was necessary to bring the machinery to working condition. It is therefore added to the asset cost instead of being recorded as a routine installation expense. Machinery cost is ₹60,000 + ₹4,000 = ₹64,000.
Entry 3: Part payment to the supplier
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Orion Equipment A/c Dr. | 25,000 | — |
| To Cash A/c | — | 25,000 |
| Being part payment made to Orion Equipment | — | — |
| Total | 25,000 | 25,000 |
The payment reduces the supplier liability; it does not create another machinery purchase. Closing payable to Orion is ₹60,000 − ₹25,000 = ₹35,000 credit balance.
Independent audit checks
- Journal total: Combined Debit ₹89,000 equals combined Credit ₹89,000.
- Asset-cost check: Machinery Ledger receives two debits—₹60,000 and ₹4,000—giving ₹64,000.
- Supplier check: Orion is credited ₹60,000 and debited ₹25,000; the balance payable is ₹35,000 credit.
- Equation check after all three entries: Machinery ₹64,000 less total Cash paid ₹29,000 gives net Assets +₹35,000; Liabilities are also +₹35,000.
Review Types of Accounts for the asset and supplier classifications, then use Ledger Posting Step by Step to post both sides.
Author
Ejaj Abubakar Rangunwala
M.Com., B.Ed., D.B.M.
Rangunwala Academy