Definition of journal entries
Journal entries are the building blocks of accounting procedures. They are the first steps for recording financial transactions. The term consists of two parts: journal and entry.
A journal is a tool that is used to record transactions in chronological order. Information that is recorded for each transaction is called an entry.
Journal entries are summaries of transactions that enable further accounting processes to take place.
Journals detail the financial transactions of a business and tell us which accounts are affected in each transaction.In this article, we will discuss journal entry accounting, the journal entry format, and understand its role in the larger picture of financial accounting.
Why are journal entries important?
What is the importance of journal entries in financial accounting? Although recording journal entries may seem monotonous and repetitive, recording accurate entries at the correct time is important for organizations to represent correct financial statements to people within the company and external parties.
If there are inaccurate entries, organizations might be perceived to be more profitable or less profitable than they actually are. This can lead organizations and investors to make incorrect decisions based on misleading information.
Recording and understanding journal entries are essential for any accountant or firm trying to prepare a company’s financial statements.
Double-entry accounting: Why you need to know it for journal entries
Before getting into the process of journal entries accounting, let us understand the concept of double-entry accounting, as this forms the basis of recording journal entries. Double-entry accounting is a standard accounting method that requires us to record every transaction in at least two accounts. This results in a debit to one or more accounts and a credit to one or more accounts.
If you want to know more about double-entry accounting and how it differs from single-entry accounting, you can read this article.
Journal entry format
Now that we know the basis of journal entries, let us look at the journal entry format and a few examples
Journal entry formats are composed of the following elements:
1. A header that includes the date of the journal entry
2. A serial number or a journal entry number that is used to index the journal, also known as ‘Folio’
3. The account name and/or number.
4. Description of the journal entry and nature of the transaction which is called ‘Particulars’.
Recording transactions in journal entries
When recording journal entries, we need to keep the following points in mind:
1. Which accounts are being affected by the transaction
2. For each account, determine if there is an increase or decrease in value
3. Make sure that each account records an equal value, thus keeping the accounting equation balanced
Every single transaction will consist of two movements: one debit movement and one credit movement. Debit and credit movements represent the increases or decreases in our accounts. Instead of saying that there has been an increase or a decrease, we say that there has been a debit movement or a credit movement.
Journal Entry Example
The transaction we will use to illustrate this example will be that of buying furniture.
Dr stands for Debit
Cr stands for Credit
A/c stands for Account
We record the date on which the transaction is taking place
We debit the account which is seeing an increase in value: the Furniture account.
We credit the account which is seeing a decrease in value: the cash account.
We enter the details of the transaction.
Bonus examples of journal entries
Now let us take a look at some more examples of journal entries.
A proprietor invested $20,000 in the organization.
Analysis of Transaction
1. Increase in Assets (Cash) by $20,000 - Debit
2. Increase in Owner's Equity by $20,000 - Credit
Results of Journal Entry:
Cash balance increased by $20,000 - Increase in Assets
Owner's Equity balance increased by $20,000 - Increase in Proprietor's Equity
The company paid $4,500 in salaries
Analysis of Transaction
1. Increase in Expenses (Salaries Expense) by $4,500 - Debit
2. Decrease in Assets (Cash) by $4,500 - Credit
Results of Journal Entry:
Cash balance decreased by $4,500 - Decrease in Assets
Salaries Paid account balance increased by $4,500 - Increase in Expenses
In the below journal entry formats, the same set of rules of journal entry are applied, but in an excel sheet. The accounts that see an increase in assets and a decrease in liabilities are debited, while the accounts that undergo a decrease in assets and an increase in liabilities are credited.
We hope that we cleared your doubts on what journal entries are. Even though the journal entry format is simple, recording and maintaining journal entries and the succeeding financial processes can be a time-consuming task. There is also the risk of human errors.
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