The accounting and bookkeeping functions of a business hinge on the accurate records of all transactions. They need complete, up-to-date details on all incoming and outgoing payments to prepare financial statements and make informed decisions.
Journal entries are the formal method for recording these transactions. While relatively straightforward in concept, journal entries provide the foundation for accurate financial reporting and key financial decisions, so they must be handled correctly to avoid reporting inaccuracies or misleading financial data.
Continue reading below as we do a deep dive into journal entries, how they’re used, and helpful tips for recording and maintaining them accurately.
What is a Journal Entry in Accounting?
What are accounting journal entries? Journal entries provide detailed records of each business transaction, whether economic or non-economic.
They mark the beginning of the accounting cycle and offer key details about all transactions. This includes the date, the accounts that are affected, and the total amounts being debited or credited.
Journal entries are posted on a company’s general ledger in chronological order. Depending on the specific system the company uses, journal entries may be recorded on paper or in digital accounting software systems.
Why Are Journal Entries Important?
Journal entries support double-entry accounting systems. This means that for every transaction, there is at least one debit and one credit, with the totals in each column equalling one another.
As mentioned above, journal entries are the basis for nearly all accounting and financial functions. After recording the journal entries, these values flow through to the chart of accounts, then get posted to the general ledger once checked for accuracy.
In other words, journal entries are what enable bookkeepers and accountants to prepare official financial statements, create reports, and drive financial decisions.
They also provide a clear record of all transactions the business has made, offering transparency into the company’s spending habits and sources of income.
Components of a Journal Entry
Let’s now take a closer look at the key elements of journal entries:
- Date: The specific day on which the transaction occurred.
- Account names and numbers: The two or more accounts that the transaction impacts, and the corresponding numbers, where applicable. (e.g., accounts receivable, revenue, accounts payable, cash)
- Debit and credit amounts: The specific dollar value being debited or credited from the transaction.
- Description or memo: A quick explanation of the transaction, which is useful during an audit.
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Different Types of Journal Entries
There’s more than one type of journal entry that companies can use to record transactions. Here’s a closer look at the main types:
Standard Journal Entries
Standard journal entries are used to initially record transactions in the books as they occur. Some common examples may include recording office rent and utility bills, payroll expenses, and sales from customers.
Adjusting Journal Entries
Adjusting journal entries occur at the end of the period. This is when the bookkeepers make any necessary adjustments for accruals, deferrals, and depreciation to ensure revenues and expenses follow the matching principle and are recorded in the right period.
Closing Journal Entries
Closing entries in accounting are used at the end of the period to close or “zero out” temporary accounts. This allows companies to start the new period with no balance in these accounts to enable accurate reporting.
Some closing journal entries examples would include transferring the balance from revenue and expense accounts to permanent accounts.
Steps to Create a Journal Entry
Recording journal entries is not a highly complicated process. Here are some of the basic steps you can use to create one:
- Identify the transaction. Recognize that a transaction has occurred, either by viewing daily POS data, receiving an invoice from a vendor, etc.
- Determine the accounts affected. Based on the details of the transaction, figure out which two (or more) accounts are impacted.
- Decide the debit and credit amounts. For the specific accounts involved, determine whether there will be a debit or credit to the balance, and the correct amount for each.
- Record in the journal. Using all the gathered details, record the journal entry, ensuring total credits and debits equal one another.
Accounting Journal Entries Examples
To provide a better understanding of what goes into a journal entry and the details it provides, here are a few examples of common transactions companies have in the course of doing business.
Recording sales revenue
When a business makes a sale of a product or service, it needs to record how much it received from the client and the corresponding revenue.
In this case, let’s say the business sold a product for $250, which the customer paid for in cash. The corresponding journal entry would show an increase to the cash account of $250 (debit) and an equal increase to the revenue account (credit).
The journal entry would look slightly different if the purchase requires the company to collect sales tax. Here’s what the journal entry would look like with sales tax of 6%.
Paying for office supplies
Alternatively, let’s say the company makes an order of $325 for more pens, paper, and other supplies for the office. It pays for the purchase in cash, which would decrease (credit) this account and increase the balance on the expense account (debit).
Now, let’s say the company made the purchase on credit, not in cash. Rather than impacting the cash account, it would increase the accounts payable account (credit) while still increasing the expense account (debit).
Adjusting for depreciation
When a company owns a long-term asset, it must record depreciation expense each year to account for its loss in value.
In this scenario, let’s say the company purchased a piece of machinery for $15,000, which it expects to use for five years (the useful life of the asset). If the company uses the straight-line depreciation method, it would record the same depreciation expense for each of the five years it uses the machinery:
$15,000 / 5 = $3,000 per year
If the company is recording the depreciation expense for the month, we would need to divide this yearly expense value by twelve:
$3,000 / 12 = $250 per month
Thus, the journal entry to record this transaction would show an increase to the expense account (debit) and a decrease in accumulated depreciation (credit).
Recording accrued expenses
For expenses the company has incurred, but not yet paid, they’ll need to record a journal entry as an accrued expense.
This scenario might occur for a company that runs payroll bi-weekly, meaning they accrue salary expense even in the week when they’re not sending employees a paycheck.
Best Practices for Recording Journal Entries
Follow these expert tips and best practices to ensure complete and accurate journal entries:
Check your work as you go
A simple, easy way to check journal entries for accuracy as you complete them is to ensure total debits equal total credits for a given transaction. This doesn’t necessarily mean the journal entry is 100% correct, though it is a quick way to ensure you’re on the right track.
Keep in mind that there may be more than two accounts involved in a given journal entry. So, this tip can be especially useful for more intricate or complicated entries with multiple accounts.
Don’t procrastinate
One common mistake is to put off recording journal entries during busy periods. While this may seem like the right thing to do in the moment, letting transactions pile up for a prolonged period without recording the corresponding entries can make it easier for some to slip through the cracks and not be entered into the books.
This can lead to inaccurate records and financial statements, which can have serious consequences if gone unchecked.
Conclusion
Recording journal entries correctly is crucial for accurate financial reporting and other finance and accounting functions. However, staying up-to-date on journal entries can be a challenge, especially if you’re in the growth stage and focused on scaling up your business with limited resources.
Rather than let these critical bookkeeping tasks slip through the cracks, turn to an outsourced team like Bob's Bookkeepers. Combined, our team has decades of experience in the industry, and we’re proud to have worked with companies across all sectors and stages of development.
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