Journal Entries
Record prepayments, bills, draws, loan payments, and depreciation correctly.
Pen and paper is fine · no calculator needed why?
Opens at level 26. You're level 1. You can read and practice here now.
the idea
A journal entry records one transaction as debits and credits that add up to the same amount. Most slips are about timing: when the work happens and when cash moves.
Cash that arrives before the work is still owed to the customer, so it waits in unearned revenue, a liability. A bill or wages you owe but have not paid wait in a payable account, like accounts payable. Depreciation moves no cash, and an owner's draw is not an expense.
techniques
Let timing pick the accounts
- Cash before the work: debit cash, credit unearned revenue. When the work is done, debit unearned revenue, credit revenue.
- Cost before cash: debit the expense, credit a payable. Paying later: debit the payable.
- Depreciation: debit depreciation expense, credit accumulated depreciation.
worked example
A customer prepays a design studio $2,000. The studio then finishes $1,500 of that work. How much is still recorded as unearned revenue?
- Prepayment: debit Cash $2,000, credit Unearned revenue $2,000.
- Work done: debit Unearned revenue $1,500, credit Revenue $1,500.
- Left: $2,000 − $1,500 = $500.
Answer: $500
Split the loan payment
- Interest is the balance times the monthly rate: debit interest expense.
- The rest of the payment is principal: debit the loan.
- Credit cash for the whole payment.
worked example
A loan balance is $10,000, and this month's interest is 1% of the balance. You pay $600. How much should be debited to the loan account (principal)?
- Interest: $10,000 × 0.01 = $100.
- Principal: $600 − $100 = $500.
Answer: $500
Count only cash lines
- Start with opening cash.
- Add money in: collections, loans, owner investments.
- Subtract money out: equipment, fees, bills paid.
- Skip new invoices and depreciation: no cash moved.
worked example
Cash starts at $3,000. This month: collect $800 from a customer, pay a $40 bank fee, record $200 of depreciation, and invoice $1,000 of new work to be paid next month. What is the ending cash balance?
- Skip the depreciation and the new invoice.
- Cash: $3,000 + $800 − $40 = $3,760.
Answer: $3,760
watch out for
- Crediting revenue when a customer prepays. A prepayment is work you owe until it is done.
- Debiting the whole loan payment to the loan and skipping the interest expense.
- Debiting the expense again when paying a bill already recorded. That counts it twice.
- Counting a new invoice or depreciation as cash.
practice
Pick the journal entry
worked example
A customer prepays $3,200 for work you'll do next month. Which entry records the payment today?
- Debit Accounts receivable $3,200 / Credit Revenue $3,200
- Debit Unearned revenue $3,200 / Credit Cash $3,200
- Debit Cash $3,200 / Credit Revenue $3,200
- Debit Cash $3,200 / Credit Unearned revenue $3,200
Answer: Debit Cash $3,200 / Credit Unearned revenue $3,200
- Cash goes up: debit. Unearned revenue (a liability: work you owe) goes up: credit. It becomes revenue when the work is done.
Split a loan payment
worked example
A loan balance is $8,000, and this month's interest is 1% of the balance. You pay $630. How much should be debited to the loan account (principal)?
Answer: $550.00
- Interest = $8,000 × 1% = $80 (debit interest expense).
- The rest, $630 − $80 = $550, reduces the loan (debit loan payable). Credit cash $630.
Cash balance after the entries
worked example
Cash starts at $16,200. This month: pay a $2,350 supplier bill, record $500 of depreciation, pay a $5 bank fee, and receive $3,500 invested by the owner. What is the ending cash balance?
Answer: $17,345.00
- Cash in: $3,500. Cash out: $2,350 + $5 = $2,355.
- Ending cash = $16,200 + $3,500 − $2,355 = $17,345.
- Not cash: depreciation (no cash moves).