3.5 Use Journal Entries to Record Transactions and Post to T-Accounts

Journal Entries

A journal entry is the formal recording of a transaction in the accounting system. In Luxembourg, journal entries must include PCN account numbers and proper classifications.

Journal Entry Format

Standard Format:

Date: YYYY-MM-DD

Account Name (Account Number)        Debit      Credit
─────────────────────────────────────────────────────
Account to be Debited (XXXXXX)       €X,XXX
Account to be Credited (XXXXXX)                €X,XXX
Description of transaction

Rules for Journal Entries

1. Every entry must have at least one debit and one credit
2. Total debits must equal total credits
3. Debits are recorded first, then credits (indented)
4. Include PCN account numbers
5. Include clear description

Common Journal Entry Examples

Example 1: Owner Investment

Transaction: Owner invests €20,000 cash in the business.

Journal Entry:

Date: 2024-11-01

510000 Cash (Class 5)                €20,000
101000 Share Capital (Class 1)                €20,000
To record owner investment

Example 2: Purchase Equipment for Cash

Transaction: Purchase €8,000 equipment, paying cash.

Journal Entry:

Date: 2024-11-05

223000 Equipment (Class 2)           €8,000
510000 Cash (Class 5)                         €8,000
To record purchase of equipment

Example 3: Purchase Inventory on Credit

Transaction: Purchase €3,000 inventory on credit from supplier.

Journal Entry:

Date: 2024-11-10

321000 Inventory (Class 3)           €3,000
400000 Accounts Payable (Class 4)             €3,000
To record purchase of inventory on credit

Example 4: Sale with VAT (Cash)

Transaction: Sell services for €2,000 (excluding VAT), receiving cash. VAT rate 17%.

Journal Entry:

Date: 2024-11-15

510000 Cash (Class 5)                €2,340
701000 Service Revenue (Class 7)              €2,000
430000 VAT Payable (Class 4)                    €340
To record cash sale with VAT (17%)

Example 5: Sale on Credit

Transaction: Sell goods for €1,500 (excluding VAT) on credit. VAT rate 17%.

Journal Entry:

Date: 2024-11-18

410000 Accounts Receivable (Class 4) €1,755
700000 Sales Revenue (Class 7)                €1,500
430000 VAT Payable (Class 4)                    €255
To record credit sale with VAT (17%)

Example 6: Pay Expense

Transaction: Pay €1,200 rent expense.

Journal Entry:

Date: 2024-11-20

612000 Rent Expense (Class 6)        €1,200
510000 Cash (Class 5)                         €1,200
To record payment of rent

Example 7: Purchase with Recoverable VAT

Transaction: Purchase €5,000 equipment (excluding VAT), paying cash. VAT 17%, recoverable.

Journal Entry:

Date: 2024-11-22

223000 Equipment (Class 2)           €5,000
431000 VAT Recoverable (Class 4)       €850
510000 Cash (Class 5)                         €5,850
To record purchase of equipment with recoverable VAT

Example 8: Pay Accounts Payable

Transaction: Pay €2,000 to supplier for previous purchase.

Journal Entry:

Date: 2024-11-25

400000 Accounts Payable (Class 4)    €2,000
510000 Cash (Class 5)                         €2,000
To record payment to supplier

T-Accounts

T-accounts are visual representations of ledger accounts, shaped like the letter "T".

Format:

Account Name (Account Number)
─────────────────────────────
        Debit        Credit
─────────────────────────────
[Entries]    │    [Entries]
─────────────────────────────
Balance      │    Balance

Rules:

• Left side = Debit
• Right side = Credit
• Normal balance on the side that increases the account

Posting to T-Accounts

Let's post the journal entries above to T-accounts:

Cash Account

Cash (510000)
─────────────────────────────
Nov 01  J1    €20,000  │
Nov 15  J4     €2,340  │  Nov 05  J2     €8,000
                       │  Nov 20  J6     €1,200
                       │  Nov 22  J7     €5,850
                       │  Nov 25  J8     €2,000
─────────────────────────────
Balance  €5,290

Equipment Account

Equipment (223000)
─────────────────────────────
Nov 05  J2     €8,000  │
Nov 22  J7     €5,000  │
─────────────────────────────
Balance €13,000

Accounts Payable Account

Accounts Payable (400000)
─────────────────────────────
        │  Nov 10  J3     €3,000
        │
Nov 25  J8     €2,000  │
─────────────────────────────
        │  Balance  €1,000

Service Revenue Account

Service Revenue (701000)
─────────────────────────────
        │  Nov 15  J4     €2,000
─────────────────────────────
        │  Balance  €2,000

Normal Balances

Each account type has a normal balance (the side where increases are recorded):

Account Type	Normal Balance	Increases	Decreases
Assets	Debit	Debit	Credit
Liabilities	Credit	Credit	Debit
Equity	Credit	Credit	Debit
Revenue	Credit	Credit	Debit
Expenses	Debit	Debit	Credit

Luxembourg Compliance Note

In Luxembourg, businesses must maintain:

• General Journal (Journal Général): All transactions chronologically
• General Ledger (Grand Livre): All accounts with balances
• Subsidiary Ledgers: Detailed accounts (customers, suppliers)

All must:

• Use PCN account numbers
• Be maintained for 10 years
• Be available for audit
• Support all entries with source documents

Think It Through

Why is it important that total debits equal total credits in every journal entry? What would happen if they didn't balance?

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