19 Aug 2016

Journals - It's Just Like Playing On A See Saw!!!

I have been having a discussion inside Quora recently and I wanted to share it with you because this aspect of bookkeeping can be so confusing to small business owners and there is no reason why this should be the case.

The discussion is based around how to enter journals correctly.

Now, don't start swearing when you read the magic word "journal" because I'm going to give you an explanation on this aspect of bookkeeping that should make it ever so easy to understand it.

Think of journals the same way as you think about a see saw - that's it!!! LOL

I can already hear you yelling "WHAT?", so let me explain what I mean -

Picture a see saw in your head - got it? - now answer me this question -

"When is a see saw balanced?"

"When both sides of the see saw are exactly the same weight."

That's it - can we go home now?

No? Ok, let me explain a little further!!!

Everything to do with journaling is based around "balancing" and what I mean by this is the numbers on one side have to balance to the numbers on the other side or else the journal is not right.

So - for those of you who prefer pictures, this is what a see saw - sorry journal - should look like for it to be correct -


So, you see above that there are two "things" sitting on the see saw called Debit and Credit - Debit sits on the left side of the see saw and Credit sits on the right side of the see saw - and by the look of things they are obviously the same weight because the see saw is exactly even, right?

Now, lets look at this from a practical perspective for a minute - lets change Debit's name to Materials (it could be Fuel, Stationery, Office Supplies, whatever) because you just bought some materials for your business and you paid for these materials from your business bank account, so what do we need to change Credit's name to?

Business Bank Account did I hear you say? Correct - well done!!!

So, we now know that we have Materials on the Debit side of a journal and Business Bank Account on the Credit side of the journal, but what happens if we do this -

What happens if the Materials cost you $100.00, but we only entered the amount of $90.00 on the Business Bank Account side?




That's right - as you can see, the Materials amount is "heavier" than the Business Bank Account amount so the credit amount "slips down" the see saw and crashes into the Materials amount - no good!!

Ok, so what happens if the Materials cost you $100.00 but you enter the amount of $110.00 on the Business Bank Account side?


You've got a similar problem haven't you, only this time Business Bank Account is "heavier" than Materials so Materials "slips down" the see saw and crashes into the Business Bank Account amount.

So, is it beginning to make sense now?

There's nothing difficult about journal entries - all they are is a see saw with one side called Debits and one side called Credits and until the see saw looks like this -


- then something is wrong with it.

I hope this helps you understand all this journalling stuff a little better and if you want to know more on it, just let me know.

2 comments:

  1. Replies
    1. Thanks Gordon - the subject comes up so often that I thought it about time someone put it into plain English - I thought it so important that small business owners understand this better that I have recently released a podcast about it on BookPals Business Sanity - you can listen to it at http://podcast.bookpals.biz/e/episode-73-journals-and-see-saws/ - always happy to come up and give a presentation on it if people need clarification on it up there at the Adelaide Hills Business Centre.

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