Keeping the financial records secure is a prime objective for a company that wishes to work with the utmost accuracy. A business is always associated with sales and purchases, so there should be a dedicated space where a company can access detailed and clear histories of its financial activities. That’s where journal entries serve a purpose. But what is a journal entry? Let’s delve into the following points to learn further on this front.
An Introduction to Journal Entry: What Do You Mean by the Term?
Do you know what a journal entry mean in accounting? Simply put, a journal of accounting is a business record. From preparing financial statements to determining fiscal integrity for the stakeholders, a journal entry does it all. Simply put, it’s a record of any business transaction in its accounting books. A well-documented journal entry comprises the following:
- The right date
- The right amount to be credited or debited
- The transaction’s description
- A reference number
The prime objective of using this type of entry is that it simplifies accounting. With this, businesses can keep track of affected accounts. Since journal accounting maintains accurate financial records, a company can get a clear history of its fiscal activities. That way, it ensures accountability, transparency, and utmost compliance based on the accounting standards.
Note that most businesses prefer a double-entry accounting system. That means, each financial transaction can impact a minimum of two accounts. The first is the credited one, while the other is debited. So, a journal entry comprises equal credit and debit amounts.
Understanding Its Role and Rules
The journey entry lists a record of transactions, showing specific accounts affected by any transaction. They are used in a double-entry accounting system, which needs both credit and debit to complete every entry. Thus, every time a company makes a purchase, the inventory increases alongside the amount for AP (accounts payable).
Journal entries offer information used by auditors to monitor the number of financial transactions impacting the company. There should be two line items in the journal entry, althoughthere is no upper limit based on the items to be included. A simple journal entry is a two-line journal entry, whereas a compound journal entry is the one that contains more such items.
The total credits and debits for a transaction should equal one another so that the accounting transaction is in balance. In circumstances where the transaction isn’t in balance, creating financial statements wouldn’t be available.
Journal Entry and Its Elements: Things to Note
Want to discover the basic accounting journal entries? The journal entry needs these elements:
- A header that should include the entry’s date
- A journal entry number or reference number (required for indexing and retrieving it)
- The name and account number are recorded in the first column where the entry should be recorded
- The debit amount to be inserted in the 2nd column
- The credit amount to be included in the 3rd column
- The journal entry’s description is to be included right in the footer
Accounting Journal Entries: Noting Down the Types
To be honest, there are six different categories of journal entries. The following are points mentioned in brief:
1. Opening journal entry
Opening entries carry the ending balance of the previous accounting period as the balance of the current period. The liabilities for the period should be settled, and then the closing balance.
2. Transfer journal entry
The next step is the transfer entry. This type of entry is used by companies when they intend to move and allocate the income or expense from one account to the other. To move or allocate an expense or income from one account to another, transfer entries are used. Note that the transfer journal entry for a transfer should be made. No third parties are involved in these types of transactions. So, the transfer is net zero.
3. Adjusting journal entries
Adjusting journal entries can reflect changes to any accounts that aren’t accounted for in any journal. It is one of the accurate methods where entries are included in a general ledger at an accounting period’s ending. The best accounting journal entry examples for adjusting journal entries are deferrals, accruals, and estimations. The expense accrual is the expense reported in any accounting period. However, it is not yet paid at the time of its report.
One quick note: Revenue accrual occurs during the times when customers have not billed the delivered products or accomplished work. If the payment is made before the items are incurred, it is called expense deferral. Lastly, if the corporation receives money for products or services in advance, it is known as deferred revenue.
4. Compound journal entry
Compound entries record a wide range of accounts credited or debited accordingly. The total credits and debits should be equal. However, the number of debits and credits may not be equal as per the journal entry’s rule. Also, there can be two or more credits but only one debit. Or, there also can be one credit but more than one debit or equal numbers.
5. Closing journal entry
Closing entries indicate the closure of a particular accounting period, with the balance moved from the temporary to the permanent account. It might move from one to another accounting period. Considering the temporary accounts, the closing entry zeros out the account. Also, the amount remaining gets transferred to a permanent one.
The temporary account is then closed. Losses and expenses associated with income and revenues are a few examples of this type of entry. Considering any accounting period, a closing entry means the final balance of any account is at the period’s close. The value is, of course, moved to the next period. Only the accounting period for that particular account is closed in such a circumstance.
6. Reversing journal entry
The last and final type is the reversing journal entry. In short, reversing entries are made at the new accounting period’s start in order to reverse or undo the adjusting entry at the previous period’s completion. It reduces the accounting mistakes caused by double-counting costs or income. At the same time, it also improves the efficacy of processing any actual invoice in the forthcoming accounting period. In short, these get utilized to simplify bookkeeping activities.
The Format of a Journal Entry
Journal entries follow a particular format. Look at the table to get a better understanding:
| Debit | Credit | |
| Account name or number | (the amount) | |
| Account name or number | (the amount) |
The first column contains the number or account name’s information. The second one has the debit amount, while the third one has the credit amount.
The account number or name of the account is indented. You can also include the journal entry identification number, entry date, and a description.
For multiple journal entries, you can include the approval signature block and a signature alongside the date block in the software.
Easy Steps on Creating a Decent Journal Entry: Aspects to Follow
The following are the steps you must follow to create a decent journal entry:
1. Identifying the accounts
Recognizing the journal accounts might be confusing, especially when you have no knowledge about accounting principles. So, look for the accounts that will gain something.
2. Sort out the transactions
After this, you need to sort out the type of transaction.
3. Follow the money
How will the transaction affect the value, considering credits and debits? You may ask where the money comes from. Or what did your transaction add to your business?
4. Determining the type of account
A few transactions are extremely easy, considering debits and credits in affected accounts. Other transactions are somewhat difficult. So, get familiar with the basic account types. You can use standard rules to direct where to apply for debits and credits.
5. Preparing your entry
So, now is the time to prepare the entry after recognising the account and type of transaction. Enter the right date that ensures the data contained is applied to the right accounting period. After this, it’s time to assign the code and account name. Next, you need to enter the credit and debit amounts too.
Things to Keep in Mind When Preparing a Journal Entry: Best Tips and Hacks
You can follow the following tips to prepare your business’s accounting journal entries:
- Give a comprehensive narrative of why you’ve created your journal entry for someone to check it before reviewing the books
- Refrain from including multiple line items (see whether you can simplify your journal entry)
- Use an entry template if you are preparing it for the first time (checking the templates helps you mitigate the chances of an improper entry)
- An automatically reversing entry is useful for accruals that are for one accounting period (it reduces the risks of manual errors during the next accounting period)
Final Words
A company records its daily fiscal transactions in journal entries. These transactions are recorded, and if case rules aren’t followed, the statements prepared won’t represent a fair and true view of the financial position of a business.
In short, a journal entry is useful to a wide range of business types, such as tax authorities, business entities, management, government, and more. These businesses can make different decisions by offering the required information at the right time. Such entries are handled with a specialized software system that can produce error-free statements.
FAQs
Are there any rules used in journal entry?
Yes, as per the rule, journal entry needs the total credits and debits to be equal. However, the number of debits and credits do not have to be equal amounts. For instance, there might be two credits and one debit or one credit and two debits or two credits or debits.
Is there any standard format for a journal entry?
Yes, a journal entry follows a standard format. The well-formatted one includes the right date, the amount to be debited or credited, the description of the transaction, and a valid reference number (for example, the check number).
Are journal entries yearly or monthly?
When it comes to accrual accounts, you must make the adjusting entries to the journals each month. Note that adjusting entries ensures the revenue and expenses for every accounting period match. This helps you achieve an accurate income statement and balance sheet.