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The Corporate Finance Institute Accounting
Journal Entries
Journal entries are by far one of the most important skills to master
as a professional accountant or a bookkeeper. Without proper journal
entries, companies’ financial statements would be inaccurate. An easy
way to understand journal entries is to think of Isaac Newton’s third
law of motion, which states that for every action, there is an equal and
opposite reaction. So, whenever a transaction occurs within a company,
there must be at least two accounts being affected.
Going back to the previous example, if a company bought a car, the
company’s assets would go up by the value of the car. However, there
needs to be an additional account that changes (i.e. the equal and
opposite reaction). The other account that is affected is the company’s
cash, which goes down because they used the cash to purchase the
car. Finally, just like how the size of the forces on the first object must
equal that of the second object, so must the debits and credits of every
journal entry.
How to Approach Journal Entries
A journal is the company’s official book wherein all transactions are
recorded in chronological order. Although many companies nowadays
use accounting software to book journal entries, journals were the
predominant method of booking entries in the past. In every journal
entry that is recorded, the debits and credits must be equal to ensure
that the accounting equation (A = L + SE) remains in balance. When
doing journal entries, we must always consider four factors:
1. Which accounts are affected by the transaction
2. For each account, determine if it is increased or decreased
3. For each account, determine by how much it changed
4. Make sure that the accounting equation stays in balance
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