What are the process & steps of making a journal entry?

The first step in the process of preparing a journal entry is to analyze the accounts involved in a business transaction and then apply the rules of debit and credit based on the type of each account. After identifying the accounts involved in the transaction and deciding upon the applicable rules, the journal entry is recorded in the general journal in a specified format which includes the following details:

Date of transaction

Ledger accounts involved

Amount of transaction

A brief narration to describe the transaction

Format of general journal

Let’s understand the format of general journal and the process of making a journal entry through an illustration.

Transaction:

January 05: Purchase of machinery by making cash payment of $15,000.

Analysis of transaction:

journal-entries-img1

Recording journal entry:

According to rules of debit and credit, when an asset increases, its account is debited and when an asset decreases, its account is credited. In this transaction, machinery (an asset) is increasing, and cash (an asset) is decreasing.  So the journal entry would be made as follows:

journal-entries-img2

All business transactions are recorded in the general journal in a manner illustrated above. After making journal entries in the journal, they are periodically posted to the ledger accounts.