A must-read of journal entries definition
Are you ready to take on accounting? If you are here then it means that you have taken the first step. Congratulations! Accounting is not easy, but it is very important to keep your finances in check as well as show that the company’s transactions are legitimate when auditing season shows up. And journal entries are no different. It is the first step in the accounting cycle. If none of these ring a bell, no worries Appvizer starts with the journal entries definition below.
What is the journal entries definition?
After one has made a transaction, the use of a journal entry definition is to record your business’ financial transactions using the double entry accounting system in the accounting books, with the exact date, debited and credited amount, the transaction’s description and reference number. Once you’ve entered your business transactions into the journal, you then “post” them to your general ledger, which summarizes the sum of your journal entries.
A software can be used, but the journal entry can also be printed and stored in your accounting transaction’s binder with justification of the entry. Having this information is to help facilitate the auditor's investigation during the end of the accounting year, proving that companies’ financial statements are correct.
What are the types of journal entries?
Each journal entry has a specific data which corresponds to a business transaction. There are 6 types of journal entries:
1. Opening entries
This type of journal entry shows the company’s accounting situation at the beginning of each accounting period or financial year. It contains all the balance sheets accounts with open balance, such as the initial funding for the firm, initial debts that’s been incurred and the assets acquired.
2. Transfer entries
It is to move expenses or income from one account to another. It is usually done when wrong bookings occur in any account. For example, if a company transfers cash from its main account to a subsidiary, it will be represented in the journal by a transfer of the money from one account to the other.
3. Closing entries
It is, as the name says, a journal entry made at the end of an accounting period. It involves the process of eliminating all the temporary accounts to transfer the balances to permanent accounts, and is generally known as closing the books. Furthermore, it helps companies start with a clean slate for the following year. The temporary accounts are income statements that track accounting activity during the ongoing accounting period, whereas the permanent accounts, record accounting activity that lasts longer than an accounting term.
4. Adjusting entries
Adjusting entries are changes to journal entries that were already recorded to make sure that the numbers, revenues and expenses match with the right accounting period. Then, they are entered at the in the general ledger at the end of an accounting period.
5. Compound entries
A compound entry is two or more journal entries entered at the same time, rather than recording and entering them separately. It is to avoid wasting time and keeps the related debits and credits, purposely keep them coupled.
6. Reversing entry
They are done at the beginning of the following period to cancel any entries made priorly that are no longer necessary.
It can be a long and tedious process if entered manually.
How do you write a journal entry?
A journal entry is usually written with an account name and number for both debit and credit. The debit and credit entries and amount go hand in hand, as the amount entered in the debit column must correspond with the amount entered in the credit column.
Therefore, the format of a journal entry is:
Above, we can see that the double-entry bookkeeping method shows that changes occur in both accounts after a transaction has been made.
For example: If a business were to take out a loan, the transaction will be recorded as a debit to the cash account and a credit in the loan's payable account. A debit would increase the cash account (asset) and a credit would increase the loan's payable account (liability
What is included in a journal entry?
Journal entries generally include:
- A header, which is a descriptor of the entry type, and the date that was entered in the journal
- a unique numerical identifier or reference number,
- one or more accounts and transactions amounts that will be debited and the date(s) these debits are made,
- one or more accounts and amounts the transaction will credit and the date(s) these credits are made,
- a brief description of the transaction.