Accounting is the systematic recording of financial data that presents the fiscal health of a business to accountants. There is no shortcut to recording financial information, as it’s a detailed process that requires a professional to work on financial statements to calculate the net income. Every entity has the desire to minimize unnecessary expenses to achieve a higher profit margin from sales. For this, it is the responsibility of organizations to make proper journals and ledgers to finally make reports.
What Is a Journal Entry in Accounting
A journal entry carries specific details about business transactions that include the date, debit, and credit accounts along with a brief description. However, many accountants include tax details and subsidiaries in their journal entries. For this, accurate recording of journal data is necessary to summarize financial information and these days experts like to use software to reduce errors.
Every journal entry is recorded in chronological order and undergoes a double-entry system with debit and credit columns. No matter if there are multiple accounts connected with debit and credit columns, an equal amount should be added on both sides.
Let’s take a look at an example!
If a business purchases equipment worth $300 for an employee, the expense account will be increased by the amount. On the other side, the cash account will be decreased by the same amount.
Key Features
- A journal is comprised of business transactions and entries affecting accounts and balances.
- It includes data that help businesses to meet their financial reporting needs.
- Adjust entries for multiple accounts and transactions including debit and credit details.
Debits and Credits in Accounting
Debits and credits are the essentials of accounting and it is understood that the finance management concept is incomplete without debit and credit. Debit increases the asset or expense account and is recorded on the left side, whereas credit increases liability or equity and is recorded on the right side of the ledger. Therefore, adjustment on both sides is a must in accounting whenever debits and credits come into discussion.
Purpose of a Journal Entry
The purpose of recording a journal entry is to track accurate entries of business transactions, whereas many forms do it manually and digitally to reduce their workload. With the use of accounting software, it is easier to record digital entries, but it doesn’t mean to compromise on physical records. The main purpose of journal recording is to get data in one place so that the reporting process becomes easier for the organizations.
For example, say our catering purchase incurs both state and local taxes. That compound journal entry might look like this:
Here is how a bookstore adds entries of sales and taxes in a journal:
| Books for ABC Company | Debit | Credit |
| Cash | $175.50 | |
| Sale | $150 | |
| Sale tax | $10 | |
| Local tax | $15.50 |
Every journal entry covers the taxes for better record-keeping services including charts of multiple accounts. After the journal, these entries are shifted to the general ledger before preparing the financial reports. Importantly, these ledgers also assist audit teams in better analysis of financial information and this improves decision making for entities.
Things to Add to the Journal
An accountant likes to add multiple entries to the journal and this includes a header, entry type, and date. It also includes a reference number and details of transactions along with debit as well as credit entry. Additionally, the journal includes a brief description of the transactions and particular data regarding currencies.
Types of Journal Entries
There are six types of journal entries that experts use in accounting for recording transactions and presenting the objective statement. Here are the types of entries used in the journal:
1- Opening Entries
Opening entries carry the ending balance from last year’s accounting stats and use it as the current balance for the new accounting period. For example, $9000 was the ending balance of the cash account from the previous accounting cycle, and that $9000 is the opening balance of the current year.
2- Transfer Entries
Transfer entry is the act of moving and allocating expenses or income from one account to the other account. For example, a bookstore wants to transfer cash to a subsidiary account from the main account. Hence, a transfer entry of money is made to another account without involving third-party entries.
3- Closing Entries
These entries take place at the end of the accounting period and usually experts move them to permanent accounts from the temporary ones. However, temporary accounts come up with zero balance and accountants need to make sure this balance process. This is the only way to close the temporary account.
Temporary accounts not only include expenses and loss accounts, but these also cover income, revenue, and summary accounts during the accounting period.
4- Adjusting Entries
Adjusting entries record changes for all the accounts that we add to the journal. Therefore, the entries take place for recording accounts in the journal using the accrual method, and later on these entries are recorded in the general ledger when the accounting period ends. In this entry process, expenses are also recorded using this accrual method and usually, it includes entries like electricity and utility bills.
5- Compound Entries
Compound entries record debit and credit entries for several accounts at a time. Therefore, the numbers of debit and credit entries need to be equal in the accounts. For this, there may be one debit and two credit entries and two credit and one debit entries. The choice may vary and this often reflects on payroll while recording entries.
6- Reversing Entries
Reversing entries are recorded at the start of the accounting year and work as reverse entries in that period. It also seeks assistance from adjusting entries that come from the previous year when it ends. This also has an impact on income and expenses that reflect on actual invoices and need to be recorded in bookkeeping. This also provides accountants a chance to avoid errors and mistakes, especially at the time of recording expenses.
How to Prepare Journal Entries for Your Company
Preparing a journal entry is all about securing business transactions. The purpose of recording entries is to obtain accurate results in the form of transactions. However, the use of accounting software makes it more convenient and reliable for accountants to finish their recording process without committing errors. Despite this digital recording, manual recording also covers error-free processes under the supervision of professionals. How to identify the entries for your business?
Identify the Accounts
The first and most important thing is to identify the accounts keeping in mind the accounting principles and practices. Make sure you identify the areas of transactions that let experts know what has been gained and lost during the period. For this, you must look at the following things:
Sort transactions
The first thing is to sort the transactions that include bank deposits, expenses, and details of taxes for recording the transactions.
Look for Money
After sorting out the transactions, you must also look for money that affects the values of debit and credit in the accounts. In this way, you get to know where the money comes from and where it goes out. Adding the transactions can be a daunting task if you don’t follow the proper entry process and make sure your every action counts while recording transactions.
Determine Accounts Type
The most crucial part of the job is to determine the account type regarding debits and credits. However, it’s a difficult process, but for professional accountants, it is the easiest and simplest task to determine the accounts. This allows them to follow basic accounts and explore maximum details about the fiscal data.
Another important thing is to enter the correct date along with the name of the account holder before it goes to the ledger account. Another crucial thing is to double-check the debit and credit details of the account.
Did You Know?
“A well-crafted journal entry not only records a transaction but also provides valuable insight into a company’s financial health”.
Make The Pro Accountants Your Accounting Partner for Lasting Services
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