The raison d'etre of accounting is to present a concise, timely, accurate narrative of an organization’s fiscal standing. Business leaders look to their finance teams for reality checks: Can we afford to hire a new engineer? How much runway do we have? Are we spending too much on operating expenses? Show
Journal entries are the fundamental building blocks that provide the answers to those and other questions. Journal entries list vital data, such as how much was credited and debited, when and from which accounts. Each journal entry corresponds to one discrete business transaction and is eventually posted to the general ledger. The validity of all financial reports is affected by the accuracy — or inaccuracy — of the information entered at this level. What Is a Journal Entry in Accounting?Each journal entry contains the data significant to a single business transaction, including the date, the amount to be credited and debited, a brief description of the transaction and the accounts affected. Depending on the company, it may list affected subsidiaries, tax details and other information. It’s crucial to accurately enter complete journal data so that the general ledger and financial reports based on this information are also accurate and complete. With modern accounting software, recurring journal entries may be templatized and automatically executed, minimizing the potential for error. Journal entries are made in chronological order and follow the double-entry accounting system, meaning each will have both a credit and a debit column. Even when debits and credits are linked to multiple accounts, the amounts in both columns must be equal. For example, say a company spends $277.50 catering lunch for employees. The expenses account increases by that amount, while the cash account, which is an asset, decreases by $277.50 because that money is now spent. Key Takeaways
What Are Debits and Credits?Debits add to expense and asset accounts and subtract from liability, revenue and equity balances, while credits subtract from expense and asset balances and add to liability, revenue and equity accounts. In accounting, the basic principle is the same: An adjusting journal entry to account for the accruing interest on a bank loan will debit the Interest Expense account and credit the Accrued Interest Payable account. What Is the Purpose of a Journal Entry?The purpose of a journal entry is to physically or digitally record every business transaction properly and accurately. If a transaction affects multiple accounts, the journal entry will detail that information as well. For example, say our catering purchase incurs both state and local taxes. That compound journal entry might look like this:
Thus, the journal enables the caterer to accurately account for taxes owed to multiple jurisdictions. Journal entries are the foundation of effective record-keeping. They are sorted into various charts of accounts and, once verified for accuracy, posted to the general ledger, which then feeds information to the financial reports that business decision-makers depend on. Accurate and complete journals are also essential in the auditing process, as journal entries provide detailed accounts of every transaction. Auditors, both internal and external, will look for entries or adjustments that lack the proper documentation, explanations or approvals or that are outside the norm for the business. What Is Included in a Journal Entry?Journal entries may contain multiple data points but generally include:
Journal entries may also include data specific to the business, such as the subsidiary or subsidiaries involved in the transaction and the currency or currencies used. How Do You Write a Journal Entry?MyToys Manufacturing Co. buys $100,000 worth of raw materials. It pays $10,000 in cash and uses credit for the balance. The company would record a debit, or increase, of $100,000 in raw materials. The Cash account would show a credit, or decrease, of $10,000 because that was the amount paid in this transaction. The Accounts Payable Account would show an increase, or credit, of $90,000 as it now owes that amount to a vendor on a future date or dates. As MyToys makes payments over time on this purchase, the Cash Account will show a corresponding credit (less cash is available) and the Accounts Payable a corresponding debit as less money is owed by the company. Further, as the raw materials are used to produce finished products — toys, in this case — a credit is applied to the Raw Materials account to reflect a decline in value as raw materials are consumed, and the Finished Goods account is debited to reflect an increase in the amount of inventory on hand. 6 Types of Journal EntriesThere are six types of journal entries, or seven if you count the archaic, vague and seldom-used single entry. The single journal entry is not used in standard accounting, which is double-entry based. It is more suited to checkbook balancing than to business accounting, which involves many accounts. Each of the primary six entry types has a specific function in accounting. Together they present a balanced, accurate and objective statement of the company’s financial standing. They are:
How to Prepare Journal Entries for Your BusinessIt’s important to prepare journal entries properly to ensure transactions are accurately recorded. Begin by deciding what transaction must be entered where. If you use accounting software, you’ll need to make fewer journal entries because automation embedded in the software will flow relevant data to other accounts and reports as needed. If you are doing bookkeeping manually, to record a transaction properly, you’ll need to figure out everything the transaction affects on the company books. Identify the accounts that will be affected:The first step is in identifying the accounts that the transaction affects. That can be a bit confusing if you’re unfamiliar with accounting terms and principles. But in general, you’re looking for areas of impact from the transaction: Which accounts will gain something, and which will lose something in this transaction? Sort transactions first:Sorting transactions by type — expenses, bank deposits, quarterly taxes — will put you on the right path to recording these transactions correctly. Follow the money:Now that the transaction is sorted, think about how it affects the values, in terms of debits and credits, in related accounts. Ask yourself, Where did the money come from, and where did it go? What did the transaction add to the business, and what did it take away? The physics adage that “for every action, there is an equal and opposite reaction” holds true in accounting, too. Make sure you identify all actions and reactions caused by the transaction. Determine your account type:Some transactions are easy to map in terms of credits and debits in various affected accounts. Others may be a bit trickier. Here are some tips to help you figure them out,
Prepare your journal entry:Now that you’ve identified the transaction type and the accounts it affects, you’re ready to make your journal entry.
Examples of Common JournalsThe accepted, standard practice is to use a double-entry accounting system, which generally entails the use of both a general ledger and a general journal. It can also include the use of special journals for frequent transactions within a specific category. General journalA general journal is a book of raw business transactions recorded in chronological order by date. It is the first place a transaction is recorded. The amounts are then posted to the appropriate accounts such as accounts receivables, cash accounts or asset accounts. Special journalSpecial, or specialized, journals contain frequent transactions within a given category and are normally used in manual bookkeeping, to make it easier for businesses to find instances of particular types of transactions. Examples include sales and purchase journals that group sales to various customers or purchases from suppliers in one place. Modern accounting software negates the need for special journals by making it easy to sort transactions and search for granular details. How to Track Journal EntriesTo move data to the proper place in the general ledger, journal entries must be easily trackable so the information can be found and copied as needed. Multiple journal entries can be recorded and tracked in T-accounts, which help finance teams visualize entries for easier review. Examples of Journal EntriesT-accounts are a visual representation of the general ledger account. Here are some examples, as well as additional journal entry types. Two T-accounts: Cash and notes payable
Interest receivable journal entry
*Interest income accrued in previous month, received in current month
*Interest income accrued but not received General JournalInterest receivable journal entry
Using Accounting Software for Tracking Journal EntriesAs accounting grows in complexity and journal entries grow in number, tracking becomes more difficult, especially in manual entry systems. Accounting software is a better solution for most companies because much of the effort around journal entry tracking, pulling and allocating to accounts can be automated. Automation delivers increased efficiency and reduced error rates. Further, modern accounting software will greatly ease the audit process. Journal entries are the backbone of all financial reporting. As such, transactions must be verified and the corresponding journal entries cross-checked for accuracy. Whether the books are completed manually or digitally, credits and debits on affected accounts must be allocated according to standard accounting rules. From these simplified but exacting measures, a company can know where it stands financially and how far it can go with future plans. What is the difference between a ledger and a journal?What are the differences between Journal and Ledger? Journal is a subsidiary book of account that records transactions. Ledger is a principal book of account that classifies transactions recorded in a journal. The journal transactions get recorded in chronological order on the day of their occurrence.
How does posting transactions in a ledger help businesses?For monthly reporting, businesses rely on ledgers. The purpose of the ledger is to take the entries made in the journal and logs and tallies up all transactions that affect a specified account. It shows your total monthly sales of Widget A, your total payroll expenses or your total postage expenses that month.
What is the result of having a difference between GL and Sub ledger?Both general ledger and subledger accounts are used to record financial transactions. The primary difference between the two is that the general ledger is a set of master accounts, whereas the subledger is a set of accounts that is a subset of the general ledger.
What is the purpose of a subsidiary ledger what other control accounts might be supported by subsidiary ledgers?The subsidiary ledger provides an opportunity to better monitor the individual transactions of a particular controlling general ledger account. Control accounts commonly supported by subsidiary ledgers include the accounts receivable and accounts payable accounts.
|