Journal entries in accounting are like notes of a business deal in its money system. It’s an essential part of how businesses keep track of their money, a method that’s been used for a long time. These notes help to see how a business spends its money and where it gets it from.
In this method, every deal is written down in at least two money accounts. For example, when a business buys things with cash, you’ll see that written in the supplies and cash accounts. But let’s not rush; let’s start from the beginning.
Back in the day, before fancy accounting software, people used journals to write down money stuff. These entries were then copied into a big book called the General Ledger. While computers now handle most of this, it’s still good to know how it works. Sometimes, you must write things down to fix mistakes or
adjust balances at the end of a money period.
What goes into a journal entry?
Journal entries in accounting are crucial because they show exactly what happened in a transaction. They need to have enough details to reflect the real deal accurately. This helps us look back and spot any mistakes.
What to add to a Journal entry?
Here’s what you’ll find in a journal entry:
- Date of the transaction.
- The names and numbers of the accounts involved.
- The amounts credited and debited.
- A unique reference number for the transaction.
- A description of what went down.
Basic Principles of Double-Entry Bookkeeping
In double-entry bookkeeping, every financial transaction affects at least two different accounts to keep everything balanced. This balance is based on a simple formula that forms the basis of the balance sheet:
Assets = Liabilities + Owner’s Equity
Every journal entry must include equal debits and credits to balance this equation. Here’s how they affect different accounts:
- Debiting an asset account (like cash or inventory) increases its total.
- Debiting a liability or equity account (like loans or owner’s equity) decreases its total.
On the other hand:
- Crediting an asset account makes its total go down.
- Crediting a liability or equity account makes its total go up.
- This rule also applies to the income statement, where:
- Revenues increase when credited. This is because they add to the owner’s equity.
- Expenses increase when debited because they reduce the owner’s equity.
Every debit and credit in bookkeeping helps keep the financial records straight, ensuring they are clear and accurate.
How we get data into the general ledger
Long ago, bookkeeping meant writing down business transactions by hand in unique books called journals, like sales journals for sales and payroll journals for employee payments. These records would then be summarized and added to a main book called the general ledger as part of regular accounting work. This was how all financial information was recorded.
But things are much easier now with accounting software. The software automatically puts transactions into the proper accounts as soon as invoices are made, customer payments are received, or bills are paid. Because of this, accountants don’t have to write as many entries as they used to manually. The software allows small business owners to handle their bookkeeping without an accountant.
There are still a few times when manual entries are needed, though. These are usually for end-of-period adjustments or to meet specific accounting terms known as GAAP. Also, things like depreciation (the value loss of assets over time) and amortization (spreading the cost of an intangible asset over its useful life) still need to be entered by hand.
In today’s journal entries in accounting systems, the old journals still exist but are part of the software and work behind the scenes. For example, there’s a payroll module that handles all the employee payments and tax reports. While these modules focus on specific types of transactions, it looks like the user directly enters everything into the general ledger.
Understanding different types of Journal Entries
Understanding journal entries in accounting is a critical accounting tool, helping record all sorts of financial transactions. They come in different types, each serving a specific function. Here’s a look at some common types of journal entries with simple examples:
Examples of Journal Entries
General Journal Entries
These entries go directly into the general ledger, the leading accounting record. They’re not automated from things like invoices or receipts. Here’s a basic example of a general journal entry for recording how much value equipment loses over time, called depreciation:
Reference number: 9902
Date: 12/31/23
What’s recorded:
- Increase in Depreciation Expense (Account 6401) by $10,500.00
- Decrease in Value of Equipment (Account 1515) by $10,500.00
- Reason: To show the yearly loss in value of the equipment
Compound Journal Entries
These are used when a single transaction affects more than two accounts and can be more complex. Here’s an example of when a company buys machinery partly with cash and partly with a loan:
Reference number: 5432
Date: 4/10/24
What’s recorded:
- Increase in Machinery value (Account 1510) by $275,000
- Decrease in Cash (Account 1010) by $25,000
- Increase in Bank Loan (Account 2358) by $250,000
- Reason: To record buying new machinery
These examples help illustrate how journal entries track different financial activities, from simple single changes to more complex transactions involving multiple accounts.
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