Keeping precise records is a crucial for any organization irrespective of its size or the type of operation it undertakes. Journal entries are the foundation of all financial accounting as they can track every transaction contributes to the company’s financial statements.
With inaccurate journal entries, business owners are very likely to misjudge their financial position, leading to failure.
This guide intends to help small or large business owners on how to record journal entries accurate and up to date.
What are Journal Entries in Accounting
In accounting, journals are the basic records that capture financial transactions in the business. They provide details of all the transactions that occur within an organization by ensuring that all the financial activities are well recorded in the accounting system.
Key Factors of Journal Entries
Debits and Credits: Every journal entry contains at least one debit balanced by one credit, which reflect the changes in given accounts. Total debits must always be equal to total credits in any organization to balance the accounting equation (Equation: Assets = Liabilities + Equity).
Date: Journal entry must include the time and date of transactions. This enhances the ability to monitor financial events with time.
Account Titles: The journal entry shows the particular accounts to record the transaction. The account includes, Cash account, Accounts Receivable account, Sales Revenue account, and Expense accounts.
Reference Number: Journal entry usually has a reference number, such as an invoice number or check number. By this way, it is easier to look up the journal entry to a specific transaction document.
Description: A brief description should be in the journal entries to give answers to any question during the review or audit.
Role of Journal Entries in Accounting
Foundation of Financial Records: It is essential to note that journals are the source documents or the primary records of a business. They feed into the general ledger that is a summary of all your organizational transactions so as to prepare the three important statements, that include the balance sheet, income statement, and the statement of cash flows.
Double-Entry Accounting System: Journal entries are done in accordance with the double-entry system where each transaction affects at least two accounts, one being debited while the other is credited. So, this system maintains the uniformity and reliability of the accounting records.
Audit Trail: Journal entries enable tracing of the financial transactions and their history within a business. Therefore, this is important for legal requirements as well as to help in evaluating the financial position of the company.
How to Record Journal Entries – A Step by Step Guide
1: Identify the Transaction: The first step involves the examination and categorization of the transaction with a view to identifying the effect on the organization’s financial record.
2: Determine Accounts Affected: Determine which accounts will be debited or credited according to the transaction.
3: Enter the Transaction in the Journal: In the journal, document the transaction making sure that amount of debited is equal to amount of credited.
4: Cross-Verify for Accuracy: Initially glance at the entry once again to confirm all the details.
5: Post to the Ledger: Post the journal entry in the general ledger by transferring the data from the journal entry.
Journal Entry Examples
Here are the examples to record journal entries with the practical cases.
1.Recording a Sale on Credit
Case: ABC Company sells goods worth $5,000 on credit to XYZ Corporation.
Journal Entry:
Date: August 1, 2024
Accounts Receivable (Debit): $5,000
Sales Revenue (Credit): $5,000
Explanation: ABC Company records an increase in Accounts Receivable, reflecting that XYZ Corporation owes $5,000. Simultaneously, Sales Revenue is credited to show the income generated from the sale.
2.Adjusting Entry for Accrued Expenses
Case: ABC Company owes $600 in interest on a loan, which has accrued by the end of August but will be paid in September.
Journal Entry:
Date: August 31, 2024
Interest Expense (Debit): $600
Interest Payable (Credit): $600
Explanation: The Interest Expense account is debited to recognize the expense incurred during August. The Interest Payable account is credited to record the liability that ABC Company will settle in the future.
3.Closing Entry for Revenue Accounts
Case: At the end of the fiscal year, ABC Company has earned $50,000 in revenue, which needs to be closed to Retained Earnings.
Journal Entry:
Date: December 31, 2024
Sales Revenue (Debit): $50,000
Retained Earnings (Credit): $50,000
Explanation: The Sales Revenue account is debited to reduce it to zero, reflecting the closing of the account for the year. Retained Earnings is credited, increasing equity to reflect the profits earned.
Tools and Software useful in recording Journal Entries
Accounting software commonly used are QuickBooks, Xero, and FreshBooks. Definitely, software makes journal entry recording easy, eliminates errors.
Moreover, software can guarantee the issues of efficiency and accuracy especially with a growing number of transactions.
FastLane HR’s Note
An accountant need to add company’s journal entry correctly to ensure the company logbook provides accurate information. Therefore, all businesses should practice the technique of recording journal entries for long-term financial management success.
It is not a difficult process but inaccurate records can lead to difficult situation. Save this guide and use it accordingly in your financial processes.
You can also consult with finance professional at FastLane HR and get the assistance for your business financial matter.