Journal Entry (Accounting) - Explained
What is a Journal Entry?
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Table of ContentsWhat is a Journal Entry?How is an Accounting Journal Used?Using Double-Entry Bookkeeping in JournalsUsing the Single-Entry Method in JournalsHow to Make a Journal EntryExample- Borrowing money journal entryExample- Purchasing equipment journal entry
What is a Journal Entry?
Journal entries are used to record every transaction and event of a business in the accounting system since they are the beginning point in the accounting cycle. These entries are recorded in the general journal as business events continue happening over the accounting period to show how each event changes in the accounting equation.
Back to: ACCOUNTING, TAX, & REPORTING
How is an Accounting Journal Used?
A journal refers to a book of original entry in which all business transactions are recorded. A journal is important to every business for accounting or bookkeeping purposes. All business transactions, credits, debits, invoices, accounts and other business reports are recorded in a journal. All the financial transactions of a business are recorded in a journal. This recording is done chronologically by date of the transaction. The date of a transaction, type of transaction, account type are all recorded in the journal. These details are used for financial reporting purposes. Here are some things to note about a journal;
- All daily business transactions are recorded in a journal.
- A bookkeeper records the details of a business transaction in the journal.
- Either the single-entry method or double-entry method can be used when recording a company's journal.
- A journal is important for accounting purposes and to reconcile business transactions in the future.
- Auditors review journals alongside a company's general ledger during audit process.
A journal can either be a physical record in form of a book or an electronic (digital) document kept on a computer. If it is a physical record, the account book is divided into segments, where the date, account type (debit or credit) type of transaction and amount can be recorded. If it is a digital document, an accounting software is needed, this contains the spreadsheet or excel sheet where the daily details of a business can be recorded. An individual that enters the details of a business transaction in a journal is a bookkeeper. The record must be inputted in the journal everyday so that records of the journal can be reconciled in future time and for accounting purposes.
Using Double-Entry Bookkeeping in Journals
In accounting, double-entry bookkeeping entails entering the details of a business transaction to reflected the opposites entries of the transaction. All business transaction witness two forms of exchanges, this is the debit and credit. Double-entry bookkeeping means that the journal entry includes the two corresponding sides or accounts, the debt and the credit. For instance, if a business owner orders for inventory, the credit account of the company decreases while the debit increases. The double-entry bookkeeping is the most commonly used for recording in journals.
Using the Single-Entry Method in Journals
Unlike the double-entry bookkeeping method, the single-entry bookkeeping hs to do with recording the details of a business transaction as a single entry. All information regarding a business transaction are recorded in one side of the accounting book. The single-entry bookkeeping is seldom used by businesses, it is not as popular as the double-entry bookkeeping.
How to Make a Journal Entry
The following are steps to be followed in making an accounting journal entry.
If a person does not know that a transaction has occurred, then they cannot record it, so one has first to identify the business transaction. For example, if a company purchases a vehicle, it means a new asset has to be added to the accounting equation.
After an event that impacts the accounting equation economically is identified, it is analyzed. This is done to determine how this event altered the accounting equation. E.g., when the company acquired the vehicle, a certain amount of cash was used. Since these two are asset accounts, it means that the accounting equation didn't change although an economic event took place because the cash was converted into a vehicle.
The next step after identifying and analyzing a business event is recording it. By using debits and credits, journal entries can record the changes in the accounting equation onto the general ledger. Usually, the format of these entries requires the debited accounts to be listed before the credited accounts. Also, each entry has a transaction date, title and a description of the event.Because of the variety of business transactions, the entries are often categorized and recorded in separate journals. For example, when cash is used to acquire a vehicle, the transaction is likely to be recorded in the cash disbursements journal. Other such journals include the sales journal, accounts receivable journal and the purchases journal.
How to Approach Journal Entries
The journal is used to record all the transactions in the order they occur. It is the official book of recording the transactions and nowadays it is in the form of an accounting software unlike in the past. Each journal entry has to have equal debits and credits to balance the accounting equation.When performing journal entries, the following four factors must be considered
- Find out which accounts are affected by the transaction
- Determine if each account is increased or decreased
- Determine how much each account has changed
- Ensure that the accounting equation always remains in balance
Example- Borrowing money journal entry
Suppose a company called ABC borrowed $200,000 from the bankThe accounts affected by this event include the cash account (asset) and the bank loan payable account (liability). The cash account increases since more cash is gained from the bank while the bank loan payable account increases since the liability of paying back the bank increases.The journal entry will therefore be:DR Cash 200,000CR Bank Loan Payable 200,000
Example- Purchasing equipment journal entry
Purchased equipment for $500,000 in cash
DR Equipment 500,000CR Cash 500,000