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A Guide to Job Costing Journal Entries

written by: •edited by: Michele McDonough•updated: 5/20/2011

What are job costing journal entries and in what situations are they needed? If you sell more than one product or service, you need to understand these types of journal entries. Jean Scheid helps us understand.

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    Why Job Costing Journal Entries Are Needed

    Confused Wikimedia Commons If you sell one widget and one widget only, you pretty much know how much it costs for you to buy it and what price to set so you make a profit. This is not so in businesses that sell more than one product or service or more than one type of product or service. Since I’m in the car dealership business, I can use my products to better explain job costing journal entries.

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    Examples of Journal Entries

    My dealership sells many types of Ford vehicles and each one of those vehicles has a sales account and a cost account. A typical chart of accounts will list sale accounts as three digit numbers in the 400 digit range where cost of sale accounts are in the 500 three digit range.

    For example, a sales account for a Ford Flex might be 401, and the cost of sale account might be 501. Let’s take the example of a Ford Flex and see what our journal would look like if we sold one. Keep in mind that when making journal entries, your debits and credits must be equal.

    Account / Description / Debit / Credit

    • 401 – Sales Account Ford Flex – Credit for $10,000
    • 501 – Cost of Sales Account Ford Flex – Debit for $8,000
    • 101 – Cash In Bank – Debit for $10,000
    • 131 – Inventory Ford Flex – Credit for $8,000

    In financial accounting, the difference between my sale account and cost of sale account, or $2,000, is my profit and that automatically rolls into my gross profit (not net profit) account. I received $10,000 to sell the Ford Flex and I also must take it out of my inventory so my accounting system knows it is sold. A debit to the cash I received and a credit to the inventory handles this part of the journal entry. The tricky part here? Look closer at the example. Sales accounts are always credited and cost of sales are always debited, even if it seems like they should be the other way around.

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    More Complicated Examples of Journal Entries

    2010 Ford Flex What if I sold that Ford Flex and had to pay an employee commission on my profit of $2,000? Here’s what that would look like:

    Account / Description / Debit / Credit

    • 401 – Sales Account Ford Flex – Credit for $10,000
    • 501 – Cost of Sales Account Ford Flex – Debit for $8,000
    • 101 – Cash In Bank – Debit for $10,000
    • 131 – Inventory Ford Flex – Credit for $8,000
    • 301 – New Sales Commission on Ford Flex – Debit for $500
    • 201 – John Smith Accrued Payroll – Credit for $500

    When it’s payroll time, the $500 debit in my New Sales Commission Ford Flex stays and to clear out the payroll entry the journal entry is simply:

    Account / Description / Debit / Credit

    • 102 – Cash In Bank Payroll Account – Credit for $500
    • 201 – John Smith Accrued Payroll – Debit for $500
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    Journal Entires with Cash in Transit

    On that same Ford Flex sale, what if I sold the Ford Flex through a finance contract, had to pay out a commission, and had to wait to receive my money from my financing source? Here’s that example:

    Account / Description / Debit / Credit

     

    • 401 – Sales Account Ford Flex – Credit for $10,000
    • 501 – Cost of Sales Account Ford Flex – Debit for $8,000
    • 106 – Finance Contracts In Transit – Debit for $10,000
    • 131 – Inventory Ford Flex – Credit for $8,000
    • 301 – New Sales Commission on Ford Flex – Debit for $500
    • 201 – John Smith Accrued Payroll – Credit for $500
    • 102 – Cash In Bank Payroll – Credit for $500
    • 201 – John Smith Accrued Payroll – Debit for $500
    • 101 – Cash In Bank – Debit for $10,000 (Obtained from financing source)
    • 106 – Contracts In Transit – Credit for $10,000 (To clear money due or in transit)

    These are some typical examples of job cost journal entries for selling a product, but what if labor is involved in your sale?

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    Job Costing Journal Entries With Labor

    Confused2 Wikimedia Commons In my car dealership, I also sell services which means I have to account for labor and part costs. Say a customer had a new muffler installed, here’s what our job costing journal entry would look like:

    Account / Description / Debit / Credit

    • 401 – Service Sales Customer Retail Credit for $1,000
    • 501 – Cost of Service Sales Retail Debit for $700
    • 131 – Ford Parts Inventory – Credit for $700
    • 101 – Cash in Bank – Debit for $1,000 (This is what I charged and received for the job)
    • 201 – Accrued Labor Cost – Credit for John Smith $100
    • 502 – Cost of Labor – Debit for $100

    When it was time to pay John Smith I simply:

    Account / Description / Debit / Credit

    • 201 – Accrued Labor Cost – Debit for John Smith for $100
    • 102 – Cash In Bank Payroll – Credit for $100 (To pay John Smith)

    Here, in financial accounting, I may have received $1,000 for the job, however, through the art of debits and credits, my accounting books know that my true profit is:

    • Sold Muffler - $1,000
    • Cost of Muffler - $700
    • Cost to Pay John Smith - $100
    • True Profit - $200
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    Job Costing Entries With Other Costs

    When considering my muffler repair, what about sales tax and shop supplies? Here’s an example of that journal entry:

    Account / Description / Debit / Credit

    • 401 – Service Sales Customer Retail Credit for $1,000
    • 501 – Cost of Service Sales Retail Debit for $700
    • 131 – Ford Parts Inventory – Credit for $700
    • 101 – Cash in Bank – Debit for $1,025 - (This is what I charged including sales tax)
    • 201 – Accrued Labor Cost – Debit for John Smith $100
    • 502 – Cost of Labor – Credit of $100
    • 344 – Shop Supplies – Credit of $25
    • 363 – Sales Tax – Credit of $10.00
    • 101 – Cash in Bank – Credit of $10 (Pay sales tax)
    • 363 – Sales Tax – Debit of $10 (To clear owed sales tax)

    Again, keep in mind that your debits must equal your credits in every journal entry.

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    Summing Up Job Costing Journal Entries

    Thumbs Up Wikimedia Commons If your business sells more than one product, has inventory, pays sales tax, and pays employees, you need to understand how job costing journal entries work. If you feel it’s all above you head, enlist in a good controller or bookkeeper and pay them what they deserve. Financial accounting is complex to learn and if you’ve got someone efficient, you don’t want to lose that person.

    Take advantage of a basic online accounting course or ask your own inside source to help you understand how your accounting journal entries work and why.

All About Journal Entries

Find tips and advice on how to record journal entries for all types of transactions along with free, downloadable forms you can use for a variety of accounting purposes.
  1. Importance of Adjusting Journal Entries
  2. Typical Examples of Journal Entries
  3. Making a Journal Entry for Anticipated Income
  4. Journal Entry for a Prepaid Liability
  5. A Guide to Job Costing Journal Entries