Accounting is the systematic recording of a business’s financial transactions. The process is crucial because it gives organizations accurate information regarding their income and expenses—factors critical to how companies operate.
A part of this accounting process is journal entries. But what is journal entry? It refers to raw business transaction records, otherwise known as financial books, chronologically ordered by date.
Read on to get a complete understanding of what is a journal in accounting.
Contents
What is Journal Entry?
Journal entries mean detailed accounts of business transactions recorded in company financial books like a general or subsidiary ledger. A complete journal entry comprises the following key components:
- Debit – A record entry of payment made or owed by an entity, usually placed on the left portion of the journal entry.
- Credit – An accounting entry that pertains to any transaction form that increases equity or liability accounts or decreases expenses or assets, placed opposite the debit section.
- Account name – A label on the journal entry that specifies the party you still have balances with.
- Amount – The figures you are entitled to or need to debit to a party.
Examples of Common Journal Entries
Journal accounting entries come in multiple types. However, there are two common examples of entries that you’ll find in most company accounting books.
1. Sales Journal Entry
A sales journal entry is information regarding the revenue generated by selling goods and services. It records three crucial details: sales, inventory reduction due to customer sales and sales tax liability. The information recorded in sales journal entries remains relatively similar for every recording.
However, some minor details may differ depending on the customer’s payment mode, whether cash or extended credit.
2. Allowance for Doubtful Accounts Entry
The allowance for doubtful accounts entry is what experts call a “contra asset,” an account that reduces the value of the credit, settlement and related financial contract risks when combined to achieve a decreased net obligation. An allowance for doubtful accounts entry is crucial in estimating incoming losses due to uncollectible accounts receivable.
The Role of Journal Entries in the Accounting Process
Journal entries are crucial to the accounting process in multiple ways. The first—and probably the most important—role of journal entries is they allow you to record tangible or digital financial data effectively and accurately. Precise financial figures are vital to any business, with even minimal errors potentially impacting your company’s processes.
Fortunately, journal entries help you detail every transaction, regardless if it affects multiple accounts. This ability to record and provide accurate financial information is also integral for another benefit of journal entries: giving key decision-makers valuable insights.
Most important corporate decisions hinge on financial status. You can accurately represent your organization’s financial health with journal entries, helping figureheads make well-informed decisions.
How to Make a Journal Entry
Journal entry creation may seem straightforward at first glance. However, every step is crucial and serves a specific purpose in the overall accounting process. Let’s briefly discuss the process of making a journal entry.
Identify impacted accounts
The journal creation process begins by determining what accounts each transaction affected. Your primary goal in this first step is to identify which accounts stand to gain and lose in each transaction.
Sort transactions by type
Once you’ve identified all affected accounts, proceed to sort each transaction. Organizing your transactions will make the process more manageable, accurate and faster. You can classify them into the following categories:
- Bank Deposits
- Borrowings
- Credits
- Expenses
- Purchases
- Taxes
Track the money
This step will require you to assess each transaction and how it affects debit and credit value on all associated accounts.
Identify the account type
A majority of transactions are far easier to categorize into specific account types. However, if you find yourself questioning what transaction belongs to which account, remember the following types:
- Assets
- Equity
- Expenses
- Liabilities
- Revenue
Start writing your journal entry
Finally, you can begin building your journal entry. As the process continues, ensure you’ve included critical details like the date, account name and credit and debit amounts.
A Prime Source for Knowledge
Accounting is an essential part of all businesses. It helps you understand where your money is going and how to make it work, and a big part of that is the journal entry. By creating these accounting entries, you can keep track of all transactions, helping you utilize your resources better to avoid financial problems.
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