A journal entry is used to record a business transaction in an accounting record. The general ledger is where journal entries are often made, however they can also be made in a subsidiary ledger and subsequently rolled forward into the general ledger after being summarized. The general ledger is then used to compile the company's financial statements.
The rationale behind a journal entry states that every business transaction should be recorded in at least two locations (known as double entry accounting). The income account and the cash account, for instance, both grow when you make a cash sale. Alternatively, if you pay with credit, the inventory and accounts payable accounts will increase.
The official record for the business is a journal that includes every transaction in reverse chronological order. Although firms now frequently record journal entries using accounting software, journals were historically the most prevalent technique.
To keep the accounting equation (Assets = Liabilities + Shareholders' Equity) in balance, the debits and credits in each journal entry must be equal.
We must always take into account four factors when writing journal entries:
- Accounts that are impacted by the transaction
- Determine whether each account has increased or decreased balances.
- Calculate the amount of the change for each account.
- Maintain the balance of the accounting equation.
- The elements of a journal entry's structure are as follows:
- On a header line, there can be a journal entry number and entry date.
- The first column lists the account name and number into which the entry is made. This field is indented if it relates to the account being credited.
- The second column is where the debit amount should be typed.
- The credit amount has to be entered in the third column.
- The reason for the entry may also be briefly explained in the footer line.
Journal entries come in a variety of forms, some of which are shown here.
In order to bring the financial statements into compliance with the applicable accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards, an adjusting entry is utilized at month's end to make the necessary changes. If the business uses the accrual method of accounting, for instance, you could accrue unpaid pay at the end of the month.
A journal entry that spans more than two lines is referred to as a compound entry. Complex transactions or multiple transactions at once are typically recorded using this method. For instance, the journal entry used to record payroll typically has several lines because it also includes numerous tax liabilities and payroll deductions to be recorded.
An adjusting entry that is reversed as of the start of the following period is known as a reversing entry. Usually, this happens because an expense that was supposed to be accumulated in the prior period is no longer required. As a result, a wage accrual from the previous period is reversed in the next period and replaced by a real payroll expense.
In general, avoid using journal entries to document routine transactions like supplier or customer invoicing. Specialized software modules that show a typical online form to be filled out handle these transactions. The software immediately creates the accounting record once you have completed the form. As a result, extensive activities are rarely recorded in journals.
It makes sense to establish a template for a journal entry in the accounting software when you frequently generate the same one. The accounts that are typically debited and credited are included in this template so that you can quickly fill it out when making a new entry. Using templates increases efficiency while lowering error rates.
Journal entries and attached documentation should be retained for a number of years, at least until there is no longer a need to have the financial statements of a business audited. The minimum duration period for journal entries should be included in the corporate archiving policy.