In accounting, journal entries are by far one of the most important skills to master. Without proper journal entries, companies’ financial statements would be inaccurate and a complete mess.
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 2 accounts being affected.
For 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 going 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 must be equal.
Written on May 24, 2019, 1:55 a.m.