1. The Accounting Cycle: Step 2
Professor Eric Carstensen
MiraCosta College

2. Step 2: Prepare Journal Entries
Journal Entry Rule #1: Each transaction MUST affect at least two accounts (basis of double-entry accounting)
Journal Entry Rule #2: Total Debits MUST equal Total Credits (see next page for Debit and Credit rules)

3. Debit and Credit Rules Assets Liabilities Owners' Equity Revenues
dr.
cr.
increases
decreases
normal balance
Revenues
Expenses
Distributions

4. Transactions from Step 1
invest $35,000 cash in exchange for stock b.
purchase insurance policy for $4,800 c.
pay first month's rent = $3,000 d.
purchase equipment for $2,000 down payment with balance ($5,200) due in 60 days e.
borrow $10,000 on note payable f.
purchase office supplies = $1,300 g.
receive payment for services = $4,500 h.
pay assistant = $2,000 for 10 days work i.
earn $7,900 to be paid in 30 days j.
make partial payment on A/P = $3,600 k.
pay dividends = $1,000 l.
receive partial payment on A/R = $4,000

5. transaction a Owner invests $35,000 in exchange for common stock
There is a 35,000 increase in the asset cash and a 35,000 increase in the owners’ equity account common stock:
debit cash 35,000
credit stock 35,000

6. transaction b Purchase insurance policy for $4,800
There is a 4,800 increase in the asset prepaid insurance and a 4,800 decrease in the asset cash:
debit prepaid insurance 4,800
credit cash 4,800

7. transaction c Pay first month’s rent = $3,000
There is a 4,800 increase in rent expense and a 3,000 decrease in the asset cash:
debit rent expense 3,000
credit cash 3,000

8. transaction d
Purchase office furniture = $2,000 down payment + balance ($5,200) due in 60 days
There is a 7,200 increase in the asset office furniture, a 5,200 increase in the liability A/P and a 2,000 decrease in the asset cash:
debit office furniture 7,200
credit cash 2,000
credit A/P 5,200

9. transaction e borrow $10,000 on note payable
There is a 10,000 increase in the asset cash and a 10,000 increase in the liability notes payable:
debit cash 10,000
credit notes payable 10,000

10. transaction f Purchase office supplies = $1,300
There is a 1,300 increase in the asset supplies and a 1,300 decrease in the asset cash:
debit supplies 1,300
credit cash 1,300

11. transaction g receive payment for services = $4,500
There is a 4,500 increase in the asset cash and a 4,500 increase in revenues:
debit cash 4,500
credit revenue 4,500

12. transaction h Pay assistant = $2,000 for 10 days work
There is a 2,000 increase in wages expense and a 2,000 decrease in the asset cash:
debit wages expense 2,000
credit cash 2,000

13. transaction i Earn $7,900 to be paid in 30 days
There is a 7,900 increase in the asset A/R and a 7,900 increase in revenues:
debit A/R 7,900
credit revenue 7,900

14. transaction j Make partial payment on A/P = $3,600
There is a 3,600 decrease in the liability A/P and a 3,600 decrease in the asset cash:
debit A/P 3,600
credit cash 3,600

15. transaction k Pay dividends = $1,000
There is a 1,000 increase in the contra equity account dividends and a 1,000 decrease in the asset cash:
debit dividends 1,000
credit cash 1,000

16. transaction l Receive partial payment on A/R = $4,000
There is a 4,000 increase in the asset account cash and a 4,000 decrease in the asset A/R:
debit cash 4,000
credit A/R 4,000

17. Partial Journal

18. Step 2 - Conclusion
All journal entries have been prepared and entered into the journal.
Next time, we’ll cover Step 3 which is called Posting. We take the various pieces of the journal entries and post them into their respective ledgers.