What Is a Journal Entry?

Journal entries are the easiest way to track a business transaction. They are recorded in the Journal, which is also known as the “book of original entry” because, for the first time, business transactions are recorded in the journal. From there, they are posted to the ledger and so on to financial statements. For preparing books of accounts, journal entries are the first steps in the recording process. It is based on the principle of debit and credit. 

Did you know? Just like in the law of motion, there is an equal and opposite reaction. Every journal entry has two effects debit and credit.

Meaning of Journal Entries

Journal entries is the recording of day-to-day business transactions. It is the second step of the accounting cycle process. It is a crucial step. The act of recording transactions is the foundation on which other steps of the accounting cycle process depend. Any error or fault in the journal entries will cast a direct impact on financial statements. And this will affect the decision-making, interpretation, analysis and conclusion drawn. To pass a proper journal entry, one must follow the debit and credit rule.  

The Rule of Journal Entries

When a journal entry is made, two aspects are debit and credit. As per the journal entry rule, a debit will always be equal to a credit or vice versa. We can represent it in an accounting equation form. 

             Debit = Credit 

            Assets = Equity Liability

The left side is for recording debit, and the right side is for credit. A transaction can be represented in this equation. And left side will always be equal to the right side. Following are the debit/credit nature of different account types.

Also Read: What is Double Entry System of Accounting

Purpose of Journal Entries

The main purpose of the journal entry is to record each and every translation of the business. No matter how small or big a transaction. Each transaction will be represented by a journal entry in the financial records. Journal entries are like a foundation of proper accounting. The journal entries are later on posted to the ledger and finally reflected on financial statements. 

Journal entries assist auditors in carrying out regular and year-end audits. The audit is the verification of books of accounts. As journal entries are details records of transactions, they help auditors in cross verifying and finding any issues and errors. 

Also Read: Learn About Accounting Principles and Concepts

Benefits of Journal and Journal Entries.

• It stores details of all the transactions that took place in a year. 
• The transactions are recorded in chronological order, which means which transactions are recorded when they occur. Thus it is easy to trace back a transaction by its date. 
• The journal vouchers are given a special journal entry number. They are in the sequence in which entries are entered. Gives out the total number of transactions of the business. 
• A document supports each journal entry. For example, an electricity bill is a supporting document. Thus the authenticity of every transaction can be checked. 
• Every journal entry is followed by narration, which is a summary of the transaction. That helps auditors in knowing the reason behind the transaction. 
• Journal is the foundation on which ledger accounts are prepared. An entry first will be made in a journal then it will be posted in the ledger.
• An error in the ledgers can be corrected by passing rectification journal entries.    

What Is Included in a Journal Entry?

A journal entry presents a transaction in its complete form. It records minute details. A journal entries consist of 

• Every journal entry is dated.
• Each journal entry is assigned a unique number. It is a kind of identifier. 
• On the top, it will show the kind of entry. Like whether the transaction is a payment or receipt. 
• There will be a minimum of two accounts that will record the debit and credit effects of the transactions. In the case of complex transactions more than two accounts are recorded.
• The amount side will be debited and credited with the same amount. 
• At the bottom, a small narration is added. This narration is a type of explanation and gives out additional information.

Also Read: What is the List of Accounting Standard   

Two Popular Ways of Recording Journal Entries

There are two popular ways of recording a business transaction. One is a Single entry, and another one is a double entry. 

• Single entry: it is not popular in the accounting world. It is the most basic way of recording a transaction. In this method, only one account is recorded by the accountant. A small business might use this method for recording business transactions. But when the quantity of transactions increases, this method will create more confusion and will not give a proper picture of the profit or loss of the business. For example, the single-entry journal will look like

With the above, we can calculate net cash inflow or cash outflow. Still, it is difficult to know the balance of different accounts. 

• Double-entry: it is a method of accounting in which a transaction impact a minimum of two accounts. It is the most common and widely used method. It is the accounting method used by small to big companies. Under this method, financial statements are prepared that provides a clear picture of profit and loss and the position of the business at the year-end. A double-entry journal will look like this.

Types of Journal Entries

There are six types of journal entries. They are for specific purposes, and they help in proper bookkeeping. They are 

• Opening Journal entries: The accountants pass opening entries at the very beginning of the year. The main purpose of these entries is to carry forward the closing balances of the previous year. For example, if the year-end cash balance for the year 2021 was ₹50000, the accountant will pass the opening entry and carry forward the ₹50000 to the year 2022 as the opening balance of cash. 
• Transfer entries: These entries are used to transfer the balance from one account to another. Here no third party is involved. For example, the closing balance of rent paid is transferred to the profit and loss account. 
• Adjusting journal entries: These entries are passed after the closing of books of accounts. These entries are for making adjustments in the record for proper presentations of financial information. For example, accrual expenses are those we have not paid in the year. Like internet used in March (last month of financial year) will be billed in next year. But this expense needs to be recorded in the year in which it was incurred. It didn't matter when the bill was issued. 
• Compound journal entries: These journal entries record more than two accounts. As per the debit credit rule, both sides will always match, but the individual account's amount will not match. Example for better understanding.

• Reversing entries: These journal entries are passed at the start of the year. They aim at reversing or adjusting entries. For example, if an accrual expense entry was passed in this year, the same entry will be reversed at the beginning of the year to remove its effects. 
• Closing entries: As the name suggests, these are passed at the end of the year. It is a process of closing the temporary accounts that have balances. The temporary accounts include the salary, rent, discount, sales purchases, other income, etc. Such accounts' balances are transferred to the profit and loss account. 

Also Read: Profit and Loss Account & Statement

Example of Journal Entries

• The rent of ₹30000 was paid by the bank.

• Capital of ₹9000 was introduced in the business. 

• Goods purchased worth ₹12000 from Mr Z.

Conclusion:

The accounting software has replaced the manual journal entry process. You can use applications like Khatabook for automatisation and ease of record keeping. This step of accounting is very important.  It is the building block of accounting. Understanding and skills for journal entries will help you easily manage the business. 

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