4 Steps to Journal Entries - Accounting

 Recall from our last post that:

Assets              = Liabilities        + Owner’s Equity 
Debit Nature     = Credit Nature + Credit Nature

Therefore, this leads to the concept of double journal entries for every transaction:
Example: I injected $300,000 cash and borrowed $200,000 from the bank to set up a business, ABC Pty Ltd

Step 1:Identify the A, L and OE in the question
-- Asset: Cash: $500,000
-- Liabilities: Loan: $200,000
-- Owner’s Equity: Capital Injection: $300,000

Step 2: Identify whether there is an increase or decrease
-- Asset: Cash: $500,000 --- increase
-- Liabilities: Loan: $200,000 --- increase
-- Owner’s Equity: Capital Injection: $300,000 ---- increase

 Step 3: Identify the Nature of the account
-- Asset: Cash: $500,000 --- Debit nature
-- Liabilities: Loan: $200,000 --- Credit nature
-- Owner’s Equity: Capital Injection: $300,000 --- credit nature

Step 4: Prepare Journal Entries:
Debit Cash of $500,000 since there is an increase in asset which is of a debit nature
Credit loan of $200,000 since there is an increase in liabilities which is of a credit nature
Credit Capital of $300,000 since there is an increase in Owner’s Equity which is of a credit nature

Dr Cash          $500,000
            Cr Loan           $200,000
            Cr Capital       $300,000

Note that the total debit and credit amount must tally, leading to duality concept

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