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Typically, the first step to entering investment journal entries is by creating a general ledger account for each asset. Asset accounts are created as credit or debit transactions which can be credited with cash inflows and debited with cash outflows. For example, you may have an assets account that has been labeled “Equity Shares” under it (usually in quotation marks) and this will be a credit balance when your company purchases shares of stock from another business. Finally, after all of these steps are taken care of, you can enter journal entries into the accounting system at any time using either software such as Microsoft Excel® or manually on paper using double-entry bookkeeping
Journal entries are a way to record the transactions in your bank account. They can be used for a variety of purposes, but they are most commonly used as a backup for tax records. Read more in detail here: journal entry examples.
A journal entry is a record of a financial transaction that took place in your company. You may guarantee that your financial accounts are accurate and thorough by maintaining journal entries. Basic accounting is covered, as well as two kinds of journal entries and three easy processes for manually or using accounting software to produce journal entries.
What is the definition of a journal entry?
A journal entry is a record of a company’s financial activities that has a direct influence on the income and balance sheets. Journal entries must always balance, which means that every debit must be matched by a credit. You should know the fundamental accounting equation and what debits and credits are before learning how to make journal entries.
What is the Accounting Process Behind a Journal Entry?
You should have a better knowledge of three key accounting concepts before creating journal entries: the accounting equation, debits and credits, and the chart of accounts. Assets equal liabilities + owner’s equity is the fundamental accounting equation. In order for a transaction to balance, it must contain both a debit and a credit. Finally, the chart of accounts is a list of the many types of accounts that are used to record transactions.
The three fundamental accounting principles are shown below, along with examples of each:
1. The Fundamental Accounting Equation
Assets, liabilities, and equity are the three main components of the accounting equation. All of the company’s assets, such as cash in the bank, accounts receivable, and inventory, are considered assets. Unpaid invoices (accounts payable) or a bank loan are examples of liabilities that your company owes to creditors and suppliers. Equity is the claim you have on the assets as a result of your ownership in the company. As you write diary entries, keep each of these factors in check.
The accounting equation, often known as the balance sheet formula, is as follows:
Liabilities + Owner’s Equity Equals Assets
Because assets equal the total of liabilities plus owner’s equity, every journal entry on one side of the balance sheet must be balanced by an equal and offsetting entry on the other side. This is done to maintain the balance sheet balanced, as the term implies.
Consider the following scenario: You pay a $1,000 bill that is recorded in your accounts payable (A/P) account. A $1,000 drop in cash and a $1,000 reduction in A/P would be included in your journal entry.
2. Credit and Debit Entries
You must apply a technique known as double-entry bookkeeping in order to keep your records in order. To stay in balance, every financial entry must have a debit and a credit, as seen in the example above. Whether an account rises or declines in value depends on the account type (asset, liability, or equity).
A T-account is the greatest approach to display debits and credits. Whether we’re working with a T-account or a journal entry, the general rule of thumb is that debits go on the left and credits go on the right.
The following are five T-accounts, one for each account type, and the effects of debits and credits on each:
T-accounts for the five sorts of accounts
The account kinds that are comparable in how debits and credits affect them are labeled with the same color in the figure above. A debit to income, liabilities, and equity accounts, for example, will reduce these accounts while a credit would enhance them. On assets and costs, debits and credits have the opposite impact. When you debit these accounts, assets and costs rise, and when you credit them, they fall.
3. Accounting Chart of Accounts
The chart of accounts is one final accounting subject you should grasp. All company transactions fit into the chart of accounts, which is a collection of account kinds. Assets, liabilities, and equity have previously been examined. Income and costs are two more account categories. The revenues from the selling of a product or service are referred to as income. Expenses are the money you spend on a daily basis to operate your company (e.g., rent, utilities).
All of the accounts you’ll use in your journal entries belong to one of the five categories listed in the debit and credit section (above). Before you start the journal entry, make sure you know what account type it is (e.g., asset or liability) and if you need to submit a debit or credit to raise or reduce the account.
Contra accounts are those with a balance that is the polar opposite of the usual account balance. Accumulated depreciation, for example, is a contra asset account because its credit balance is the inverse (opposite) of the asset’s negative balance.
The five account types are summarized below, along with samples of each and the financial statement on which they are reported:
What Is the Best Way to Write a Journal Entry?
A diary entry may be prepared in three simple stages. To begin, you must first select the kind of journal entry that is necessary (recurring or adjusting). Second, you’ll need specific information, like the journal number and the accounting period for which the journal must be entered, as well as the account name, number, and debit and credit amounts. You’re ready to start writing the diary entry after you have all of this information.
The following are the three stages to writing a journal entry:
1. Determine the kind of journal entry that is needed.
You don’t need to write a journal entry for routine business operations like invoicing clients and paying invoices. Instead, you document the transaction by filling out the relevant paperwork (such as a customer invoice or a check). When you store client invoices and bill payments, your accounting software most certainly creates journal entries. Adjusting journal entries and recurring journal entries are the two sorts of diary entries you must keep track of.
The following are the two most typical types of journal entries:
Accounting Journal Entries Adjustment
Adjusting journal entries are usually used to reflect transactions that were not recorded during the year, such as depreciation cost. When the books are closed, an adjusting accounting journal entry is usually made. Most small company owners have a certified public accountant (CPA) create the adjusting journal entries for them in order to complete the financial accounts in preparation for submitting the tax return.
An example of an adjusting journal entry for depreciation expenditure is shown below:
Accounting Journal Entries That Recur
A recurrent accounting journal entry is one that is made on a regular schedule (e.g., monthly, quarterly, annually). Let’s imagine you paid $1,200 in advance for a 12-month insurance coverage. Because you can’t expense the whole amount when you buy the policy, you’ll need to make a journal entry to record the $120 insurance charge.
A monthly recurring accounting journal entry to report insurance expenditure is shown below:
While our insurance spending example would need the same accounts and amounts each month, there are other recurring journal entries that necessitate the same accounts but different amounts. Payroll expenses, for example, must be reported each time payroll is performed, although the amounts will fluctuate depending on the number of hours worked by workers. Payroll software, on the other hand, will automatically record payroll journal entries for you.
2. Gather data in order to write journal entries
Once you’ve decided on the sort of journal entry you’ll need, you can start gathering the information you’ll need. If you don’t utilize accounting software, you’ll need a journal entry number, the date of the journal entry, and the accounts and monetary amounts you need to debit and credit.
To make an accounting journal entry, you’ll need the following information:
Number of entries in the journal
Regardless of whether you physically enter journal entries or use accounting software, you should be able to identify each one. Most accounting software packages, such as QuickBooks, issue a journal entry number to you automatically.
Date of Journal Entry
The date of the journal entry should correspond to the accounting period in which you want the transaction to appear on your financial statements. If you keep track of your journal entries on a monthly basis, the entry date may be any day of the month (e.g., March 1 to March 31). If you only record journal entries once a year, your journal entry date will very certainly be December 31 of the year you’re writing it for.
Name & Account Number
To keep in balance, every journal entry must contain at least two accounts—a debit and a credit—as previously mentioned. The accounts we utilized in the adjusting journal entry example were depreciation expenditure and cumulative depreciation. Account numbers are supported by many accounting software packages, including QuickBooks.
Account numbers are usually four or five digits long and are used to identify an account. Assets, for example, are usually assigned a number that begins with the letter “1.” (e.g., 1,000). Keep in mind that using account numbers is optional; nevertheless, your CPA or accountant may suggest that you do so.
3. Make a journal entry.
It’s time to record the diary entry after you’ve gathered all of the necessary information. Another sort of adjusting journal entry allows you to accumulate for a cost that you have yet to pay for. You may deduct expenditures that you have incurred but have not yet paid out if you use the accrual accounting method. A excellent illustration of this is payroll.
Let’s imagine your December paycheck is $3,000, but your next payment isn’t until January 1st. You want to display the expenditure in the right time period, December, since the hours were performed in December. To do so, you’ll need to make a journal entry to account for the payroll expenditure.
An example of how to enter a journal entry to incur payroll expenditure is shown below:
To counterbalance the accrual journal item (above), record the following journal entry when you run payroll on January 1:
How to Use Accounting Software to Make a Journal Entry
Accounting software simplifies the process of keeping track of accounting journal entries. To demonstrate how simple it is, we’ve included the procedures for recording a journal entry in QuickBooks Online, the most popular accounting software for small companies. If you’re new to accounting, our 46 Free QuickBooks Online Tutorials may be helpful.
The three stages to recording a journal entry in QuickBooks Online are as follows:
1. Select the Create option from the drop-down menu.
To go to the Create menu, click the + symbol to the right of the Search box:
In QuickBooks Online, go to the Create menu.
2. Go to the Journal Entry tab.
Select Journal Entry: from the drop-down menu underneath the Other column.
In QuickBooks Online, go to the Other option and choose Journal Entry.
3. Fill out the Journal Entry Form’s Required Fields.
The following screen will ask you to fill in the journal entry’s details:
In QuickBooks Online, fill in the relevant data on the Journal Entry form.
The following is the information you’ll need to provide in the journal entry box (above):
- Enter the date that corresponds to the accounting period in which this transaction occurred.
- If this is your first journal entry, you may give it a beginning number, and QuickBooks will provide a sequential number to all subsequent journal entries.
- Select the accounts that need to be added from the drop-down menu. Always choose the debit account first, then the credit account.
- Debits: In the debit column, enter the amount.
- Credits: Fill up the credit field with the amount.
- Include a short summary of the transaction you’re documenting in the description field.
What Impact Do Journal Entries Have on Financial Statements?
Every account we record in a journal entry has an effect on one or more financial statements. The balance sheet report is influenced by assets, liabilities, and equity accounts, whereas the income statement, commonly known as the profit and loss (P&L) statement, is influenced by income and expenditure accounts.
Let’s have a look at how each of the preceding journal entry examples affects the financial statements:
Example of modifying a journal entry
An example of an adjusting journal entry for depreciation expenditure is shown below:
Depreciation expenditure and accrued depreciation are the two accounts in this journal entry in the example above. Depreciation expenditure is an expense account that will show as a rise in total costs on the income statement (P&L) report. The cumulative depreciation account is a counter asset account that reduces the value of the asset being depreciated on the balance sheet report.
Example of a Recurring Journal Entry
An example of a recurring journal entry for recording insurance expenditure is shown below:
The two accounts in this journal entry are insurance expenditure and prepaid insurance in the example above. The insurance account is an expenditure account that will show as an increase in total costs on the income statement (P&L). The prepaid insurance account is an asset, and it will show as an increase in total assets on the balance sheet report.
Example of Accrued Payroll Expense Journal Entry
An example of a journal entry to record incurred payroll expenditure is shown below:
The two accounts in this journal entry are salaries expenditure and accumulated wages in the example above. The salary account is an expenditure account that will show as an increase in total costs on the income statement (P&L). The Accrued Wages account is a liability account, which means it will show as an increase in total liabilities on the balance sheet report.
Journal Entries: Frequently Asked Questions (FAQs)
We’ve compiled a list of the most often asked questions concerning journal entries from small company owners.
The following are some of the most often asked questions concerning journal entries:
What is the difference between debit and credit in a journal entry?
In order to stay in balance, double-entry accounting demands that every debit be accompanied by a credit. Assets = Liabilities + Equity is the accounting equation that explains this. As a result, each journal entry must contain one account that is debited and another account that is credited in the same amount.
What is the best way to begin a diary entry?
Determine the sort of journal entry you’ll need to begin: modifying or recurring. Second, collect important details such as the date of the journal entry, the accounts that are impacted, and the debit and credit amounts. Third, you have the option of creating the journal entry manually or using accounting software such as QuickBooks to do it.
Why do we keep a journal?
Journal entries are used to guarantee that all of a company’s transactions throughout an accounting period are appropriately reported in the financial statements. Failure to keep track of all financial activities might jeopardize your ability to get a bank loan or result in incorrect tax returns, resulting in interest and fines.
Conclusion
Journal entries are necessary to guarantee that your financial accounts correctly represent your company’s financial activities. We advocate using accounting software to record accounting journal entries instead of manually generating them. You may reduce the number of mistakes that can occur while manually entering journal entries by utilizing accounting software.
Journal entries are a type of accounting entry. They are used to record the changes in an asset, liability, or equity account during a specific period. The journal entry is then posted to the general ledger, which will update the company’s financial position at that point in time. Reference: balance sheet journal entries examples.
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