"Double-Entry Bookkeeping: Worked Journal Entries and How They Hit All Three Statements"
Double-entry bookkeeping is the engine of all accounting, and its rule fits in one sentence: every transaction is recorded in at least two accounts, and total debits must equal total credits. Because every transaction touches two places at once, the accounting equation (Assets = Liabilities + Equity) stays true at every moment.
Debit and credit: ignore the everyday meaning
"Debit" and "credit" are just the names of the left and right columns — they have nothing to do with borrowing or credit cards. The memory rule:
- Assets and expenses: increase on the debit side, decrease on the credit side
- Liabilities, equity and revenue: increase on the credit side, decrease on the debit side
Write out any journal entry and the two columns must total the same amount — that is where the "balance" comes from.
Worked examples
These are typical transactions you can execute by hand in our interactive simulator (which starts from a $150 shareholder injection). Each row shows which statements the entry touches:
| Transaction | Journal entry (Dr / Cr) | BS | IS | CFS |
|---|---|---|---|---|
| Shareholder injects $150 | Dr Cash 150 / Cr Paid-in capital 150 | ✓ | — | Financing +150 |
| Borrow $80 from bank | Dr Cash 80 / Cr Debt 80 | ✓ | — | Financing +80 |
| Cash sale (price $100, cost $60) | Dr Cash 100 / Cr Revenue 100; Dr COGS 60 / Cr Inventory 60 | ✓ | ✓ | Operating +100 |
| Credit sale (price $100, cost $60) | Dr Accounts receivable 100 / Cr Revenue 100; Dr COGS 60 / Cr Inventory 60 | ✓ | ✓ | — |
| Collect receivable $100 | Dr Cash 100 / Cr Accounts receivable 100 | ✓ | — | Operating +100 |
| Buy inventory for cash $70 | Dr Inventory 70 / Cr Cash 70 | ✓ | — | Operating −70 |
| Buy inventory on credit $70 | Dr Inventory 70 / Cr Accounts payable 70 | ✓ | — | — |
| Pay supplier $70 | Dr Accounts payable 70 / Cr Cash 70 | ✓ | — | Operating −70 |
| Pay salaries $20 | Dr Salary expense 20 / Cr Cash 20 | ✓ | ✓ | Operating −20 |
| Pay rent $10 | Dr Rent expense 10 / Cr Cash 10 | ✓ | ✓ | Operating −10 |
| R&D spending $15 | Dr R&D expense 15 / Cr Cash 15 | ✓ | ✓ | Operating −15 |
| Buy equipment $50 | Dr Fixed assets 50 / Cr Cash 50 | ✓ | — | Investing −50 |
| Depreciation $5 | Dr Depreciation expense 5 / Cr Accumulated depreciation 5 | ✓ | ✓ | — (non-cash) |
| Inventory write-down $8 | Dr Impairment loss 8 / Cr Inventory 8 | ✓ | ✓ | — (non-cash) |
| Pay interest $4 | Dr Interest expense 4 / Cr Cash 4 | ✓ | ✓ | Operating −4 |
| Pay income tax $6 | Dr Tax expense 6 / Cr Cash 6 | ✓ | ✓ | Operating −6 |
| Repay loan $40 | Dr Debt 40 / Cr Cash 40 | ✓ | — | Financing −40 |
| Pay dividend $10 | Dr Retained earnings 10 / Cr Cash 10 | ✓ | — | Financing −10 |
Four patterns worth noticing
- Every transaction moves the balance sheet, but only transactions involving revenue or expenses move the income statement.
- Credit sales and credit purchases never touch the cash flow statement — this is the root of "profit ≠ cash." A credit sale raises profit today with zero cash effect; the later collection raises cash with zero profit effect.
- Depreciation and write-downs are paper expenses: they reduce profit but consume no cash — exactly why the indirect-method cash flow statement adds them back.
- The same cash inflow means different things in different sections: borrowed money is a financing inflow; collected sales are an operating inflow. The classification itself is information.
Why doing it by hand beats reading about it
Reading ten journal entries teaches less than executing one. In our interactive simulator every transaction first shows a journal-entry preview (debit/credit accounts and amounts); on confirmation all three statements update instantly with the changed line items highlighted. After a dozen transactions, the linkage between the three statements stops being a concept you memorize and becomes muscle memory.