Lesson 4 of 9
Writing one down
A sale, a purchase on credit, a loan and a wage payment, each written as a dated entry with two sides that agree. The bindery's first eleven entries.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A journal entry is a date, the accounts affected, the amounts, and a note saying what happened. The two sides must total the same.
- Entries are written in the order events occur, which makes the journal the chronological record and the ledger the account-by-account one.
- A sale on credit is recorded when the work is done, not when the money arrives, and that single choice is what separates bookkeeping from a cash book.
The journal is the diary. Every transaction goes into it once, in date order, with both sides written out and the debits placed above the credits by convention.
Fen Street Bindery's whole first year is eleven entries. They are set out below in full, because the rest of this course works with nothing else.
The year in eleven entries, by size
- Sales, cash and credit$150,000
- Owner's investment$60,000
- Equipment purchase$48,000
- Wages paid$45,000
- Bank loan$40,000
- Materials bought on credit$30,000
The eleven entries
Reading the four that matter
The sale is split across two rows because two things happened. Revenue of $150,000 was earned, and it arrived as $110,000 of cash and $40,000 of promises from customers. Both rows credit revenue; they differ only in which asset was received.
The materials entry and the cost of sales entry are separate on purpose. Buying $30,000 of paper is not a cost. Using $26,000 of it is. The difference, $4,000, is still sitting on the shelf and is still an asset at the year end.
The deposit is the strangest looking of the eleven. Cash of $9,000 arrived and the credit went to deferred revenue, a liability, because the bindery now owes the customer a job. Money received is not revenue until the work is done.
And the interest entry records only what was paid. The loan ran all year at 6 percent on $40,000, which is $2,400, and only $1,800 was paid. The missing $600 is the subject of lesson seven.
Why the order of the columns matters
Debits are written first and credits underneath, indented, in every accounting system in use. It is a convention rather than a rule, and following it makes an unbalanced entry visible at a glance.
The other part of the convention is the narration: a short sentence saying what the entry is for. Six months later, an entry reading "Dr Prepaid rent 12,000, Cr Cash 12,000" with no explanation is a puzzle. With "twelve months of rent paid on 1 April" beside it, the year-end adjustment is obvious.
Fixing one that was wrong
Entries are not erased. A mistake is corrected by writing a second entry that reverses the first, then writing the correct one, so the record shows what was recorded, what was undone and what replaced it.
Suppose the $12,000 of rent had been debited to rent expense instead of prepaid rent. The correction is a credit to rent expense of $12,000 and a debit to prepaid rent of $12,000, with a narration saying which original entry it fixes.
This matters beyond bookkeeping. The reason a company can restate a prior year at all is that the underlying record is a sequence of dated entries, each one still there. An audit trail is not an extra feature bolted on to accounting. It is what a journal is.
What an entry cannot tell you
An entry records that something happened and at what amount. It is silent on whether the amount was a good price, whether the customer will pay, and whether the machine will last the eight years assumed for it.
Three of the eleven entries above already contain a judgement: the eight-year life of the machine, the assumption that all $40,000 of receivables will be collected, and the split of materials between used and still held. None of those is a fact. Each is an estimate that a later lesson will pull apart.
Check yourself
The bindery sells $150,000, collecting $110,000 in cash. How is the rest recorded?
- It is not recorded until the money arrives
- As a debit to accounts receivable of $40,000, with revenue credited for the full $150,000
- As a liability of $40,000
Show the answer
Answer: B.
Revenue is recorded when earned. The unpaid portion becomes an asset, a promise from a customer, rather than disappearing from the record.A customer pays $9,000 up front for work starting next year. What is credited?
- Revenue, because the cash has arrived
- Deferred revenue, a liability, because the work is still owed
- Share capital
Show the answer
Answer: B.
Cash received before the work is done creates an obligation to perform. It becomes revenue only as the work is delivered.$30,000 of materials were bought and $26,000 used. What does the $4,000 represent?
- A loss
- Materials still held, which remain an asset at the year end
- An error in the books
Show the answer
Answer: B.
Buying materials converts cash or credit into an asset. Only the portion consumed becomes a cost, which is why purchase and consumption are two separate entries.Sources
- This lesson is taught from first principles. No external source is cited, because no claim here depends on one.
What this leaves out
- Fen Street Bindery and every figure are invented, chosen so each entry can be checked by hand.
- Real journals carry many more entries, including sales taxes, payroll deductions, returns, discounts and bank charges, none of which appear here.
- The dates are deliberately coarse. Several entries here would be hundreds of separate entries in a real book, summarised for legibility.
- Nothing here is advice about any security.