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Debits and Credits

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corporatefinanceinstitute.com
10
The Corporate Finance Institute
Accounting
Journal entries are by far one of the most important skills to master 
as a professional accountant or a bookkeeper. Without proper journal 
entries, companies’ financial statements would be inaccurate. An easy 
way to understand journal entries is to think of Isaac Newton’s third 
law of motion, which states that for every action, there is an equal and 
opposite reaction. So, whenever a transaction occurs within a company, 
there must be at least two accounts being affected.
Going back to the previous example, if a company bought a car, the 
company’s assets would go up by the value of the car. However, there 
needs to be an additional account that changes (i.e. the equal and 
opposite reaction). The other account that is affected is the company’s 
cash, which goes down because they used the cash to purchase the 
car. Finally, just like how the size of the forces on the first object must 
equal that of the second object, so must the debits and credits of every 
journal entry.
How to Approach Journal Entries
A journal is the company’s official book wherein all transactions are 
recorded in chronological order. Although many companies nowadays 
use accounting software to book journal entries, journals were the 
predominant method of booking entries in the past. In every journal 
entry that is recorded, the debits and credits must be equal to ensure 
that the accounting equation (A = L + SE) remains in balance. When 
doing journal entries, we must always consider four factors:
1.
Which accounts are affected by the transaction
2.
For each account, determine if it is increased or decreased
3.
For each account, determine by how much it changed