Read Along With the VideoTranscript
Let's talk about the journal, the ledger, and the trial balance. What we're gonna do here is we're gonna try to figure out how these three things work together, from the journal to the ledger, and from the ledger to the trial balance. So let's start with the journal, and let's take a look at the definition here of a journal. It's not a newspaper or a magazine, so we're gonna leave that one out. It is a daily record of news and events of a personal nature, a diary. Okay. So what can we get out of that? We can get daily record of news and events, and since we're talking about business stuff, we're just gonna leave out this last part.
So it's a daily record of events. So you can see that the word journal in accounting is pretty much the word journal in the real world. And so a journal for accounting purposes is the chronological record of events.
So you can see that it is a daily record of events, and this is the starting place. So let's take a look at a journal entry. Just like you would make an entry in your own personal journal, we make entries into the accounting journal. And this is the entry point for any sort of accounting event. So let's say the accounting event is we paid $500 cash for inventory.
Okay. What we need to first determine is what accounts are being affected. And then next after that is do we debit or credit those accounts? So what accounts are being affected? Cash and inventory. So we know that in our journal entry, we need to talk about cash, and we need to talk about inventory 'cause our journal entry is just talking about what actually happened in the real world. And then we need to decide, are we debiting or crediting those accounts? If we paid cash, cash went down, and we got inventory, inventory went up.
And so we know from our other videos that cash is increased on the left side and decreased on the right side, credit, debit. And inventory is the same way because it's also an asset. So inventory went up. We're gonna put that over here. Cash went down. We're gonna put that over here. So now we know our accounts, and we know whether we're debiting or crediting those accounts. So now we can make our journal entry. So a journal entry just represents what happened in the real world, just like your personal journal entry. It's just a representation of what happened in the real world.
So the way that you do a journal entry, let's say this is the edge of your paper here or wherever you're answering the question, you start by putting all of your debits close to this line. So you want all your debits to be pretty close. So you have inventory.
You write the account name, and then you scoot over a little bit, and you write the amount: inventory, 500. Then for your credits, you indent them a little bit to show that it's a credit. So debits stay close to the line, and then credits you indent. So we're gonna write cash underneath here. Cash is our credit. And then the same way, you just have your little imaginary line here, and you scoot it over to the right, and you put 500 there. So that's your journal entry. So it's gonna look like this: inventory, move over, 500; cash indented. And this is your journal entry right here.
And you can imagine on a computer, this would be like the D column in Excel, and this would be the E column in Excel, and you'd have A and B. And C is sitting right here. And so you can see all the debits go here. All the credits go here. Debits go in the D column. Credits go in the E column. So it's just a nice easy way of visualizing your debits and credits in a super organized, structured fashion. So a couple things to remember about journal entries. The first is debits stay over on the left, credits, you push them out to the right.
The next thing is notice we've got 500 debit, 500 credit. Journal entries must balance. You must have debits equal to credits because these accounts here are affecting the accounting equation, and we know that the accounting equation has to always stay in balance. So inventory went up. Cash went down. We balance. That's good, 500, 500. So whenever you're doing a journal entry, if it doesn't balance, you're missing something. And when I say balance, I mean balance debits and credits. Let's say you bought inventory of 100,000. You bought a lot of inventory. You paid cash of, let's say, 40,000, and then you took out an account payable.
So you still owe them, but you're paying on credit of 60,000. Now you may look at this and say, well, that doesn't balance. There's one up here and there's two down here. That's totally fine as long as the debits and the credits balance. So this is 100,000 credit. This is 100,000 debit. So as long as the numbers balance, you can have, I mean, you can have a ton of different entries as long as at the end of the day when you add up all the debits and when you add up all the credits, they're equal. That's what I mean by balances. And we'll do more journal entries than you can ever imagine.
So don't worry if it doesn't make 100% sense right now. We're definitely going to practice this. Okay, so step one was the journal. We did all this work here. And we decided journal was a chronological record of events. And so let me talk about that chronological real fast. So you're going to have journal entries like this. Then underneath it, so that's one event, right? Then underneath it, you're going to have more journal entries. And you just work your way down just like you would in a real journal.
So that's why I say chronological because it goes down with dates. So this could be January 1. This could be January 5. This could be January 10, et cetera, et cetera. So the way you record journal entries is in the order that they happened. Okay?
Now, let's talk about ledgers. What is a ledger? Well, if journal entries are chronological, so if we say journal equals chronological, then ledger equals by account. So chronologically recording entries is what a journal is. Recording information by account is what a ledger does. So if a journal records it by the time that it happened, a ledger records it by what account it is.
And the way we get from a journal to a ledger is by a process called posting. So you post from the journal to the ledger. And it's a pretty straightforward mechanical process because you've already done all the hard work up here. You've figured out the accounts and the amounts. And so let's take inventory, cash, 500, 500. Let's go down here. And we say the journal entry is inventory, cash, 500, 500. So this is the journal entry. Now, to post that to the ledger, like I said, a ledger is done by account.
And we're just going to represent it here with T-accounts. So you would do inventory, left side, 500; cash, right side, 500. That is posting. That's it. You just post it. So then if you have another journal entry of inventory 1,000, you bought more, cash goes down 1,000, right? So we have one, two, and the journal's going down in chronological order. Then what we do is we post again to the same accounts, 1,000, 1,000. So you can see if you look at the journal, you get a line-by-line chronological record of what's happening. And if you look at the ledger, you get a bird's eye overview of what's happening.
You've got your account here and your amounts here. And so whereas in a journal, you'd have to go line by line and read all the way down if you wanted to figure out what was happening in this account. With a ledger, you just look at it because all of these, if it involves this account, have been posted to this account. And so the ledger's great because you get to just look one place and see, I just want to see a snapshot of that account. So then that leads us back up here to the trial balance. So you go from a journal to a ledger and you post items out of the journal into the ledger.
So what does a trial balance do for us? A trial balance is kind of like a balance sheet, but it's not a financial statement. A trial balance is all of the ledger accounts all lined up to test the assertion that debits equal credits.
So a trial balance is to prove that debits and credits are equal. So we take everything that's in our ledger. We take cash. We take accounts receivable. We take accounts payable. We take notes payable, inventory, supplies, literally everything. If it's in the ledger, it goes in the trial balance. And then what we do, we say account name, debit, credit. And we just go down the list and put in the amounts from the ledger. And then at the bottom, we test, do these amounts equal? Are they the same? Are the debits equal to the credits? Because if they're not, then that's an indication that somewhere along the way, we went wrong.
Most likely, we did a journal entry wrong. And the journal entry itself didn't balance, which means that this trial balance is not going to balance. That's all there really is to a trial balance. You don't have to do all the classification like you do on a balance sheet. All we're trying to do is we're trying to see, does it balance? And so you take everything from the ledger. You just line it up all the way down. Then you go through and you copy out the ledger amounts and put them here. And you put every single amount in, add them all up, and you want to make sure that all of these match.
So if you think about it, all the real work is done at the journal entry level. Because look at this. We take a journal entry. We make a journal entry. And then we just kind of change the form and post it to the ledger. Right here, we decided what accounts and what amounts. Accounts, amounts, and debit or credit. That's the work. That's the hard part. So you do the journal entry. Then you just post it to the ledger. And then the trial balance, you just read all this stuff out and put it in a different format. So if you've done your journal entries right, everything else is a piece of cake.
And if you've done your journal entries right, the trial balance is going to balance. And that's why it's so important right here that I said the journal entry must balance. Because if you have 1,000 journal entries and they all balance, then your trial balance is going to balance. Because the journal entries make up all the source material for the trial balance. But if you have one journal entry that doesn't balance, unless you make two mistakes that offset each other, then it's probably that your trial balance is not going to balance either. So it's super important that all your journal entries balance.