Question

May 1 owner put $25,000 into a business bank account
May 2 The business purchased office equipment for $5,000 paying by cheque
May 4 The business purchased motor vehicles on credit from AA motors Ltd $8,000
May 5 Purchased stock of goods on credit from Jackod Ltd for $2,000
May 6 Purchased stock of goods paying by cheque for $3,000

Answer 1

When a business transaction requires a journal entry, we must follow these rules:

The entry must have at least 2 accounts with 1 DEBIT amount and at least 1 CREDIT amount.

The DEBITS are listed first and then the CREDITS.

The DEBIT amounts will always equal the CREDIT amounts.

For another example, let’s look at the transaction analysis we did in the previous chapter for Metro Courier (click Transaction analysis):

1. The owner invested $30,000 cash in the corporation. We analyzed this transaction by increasing both cash (an asset) and common stock (an equity) for $30,000. We learned you increase an asset with a DEBIT and increase an equity with a CREDIT. The journal entry would look like this:

Debit Credit

Cash 30,000

Common Stock 30,000

2. Purchased $5,500 of equipment with cash. We analyzed this transaction as increasing the asset Equipment and decreasing the asset Cash. To increase an asset, we debit and to decrease an asset, use credit. This journal entry would be:

Debit Credit

Equipment 5,500

Cash 5,500

3. Purchased a new truck for $8,500 cash. We analyzed this transaction as increasing the asset Truck and decreasing the asset Cash. To increase an asset, we debit and to decrease an asset, use credit. This journal entry would be:

Debit Credit

Truck 8,500

Cash 8,500

4. Purchased $500 in supplies on account. We analyzed this transaction as increasing the asset Supplies and the liability Accounts Payable. To increase an asset, we debit and to increase a liability, use credit. This journal entry would be:

Debit Credit

Supplies 500

Accounts Payable 500

5. Paid $300 for supplies previously purchased. Since we previously purchased the supplies and are not buying any new ones, we analyzed this to decrease the liability accounts payable and the asset cash. To decrease a liability, use debit and to decrease and asset, use debit.