What Is a Journal Entry in Accounting? A Guide | NetSuite

Journal entries are the foundation of effective record-keeping. They are sorted into various charts of accounts and, once verified for accuracy, ... Company EducationalResources BusinessSolutionsArticles Accounting WhatIsaJournalEntryinAccounting?AGuide ScottBeaver|SeniorProductMarketingManager July22,2021 Theraisond'etreofaccountingistopresentaconcise,timely,accuratenarrativeofanorganization’sfiscalstanding.Businessleaderslooktotheirfinanceteamsforrealitychecks:Canweaffordtohireanewengineer?Howmuchrunwaydowehave?Arewespendingtoomuchonoperatingexpenses? Journalentriesarethefundamentalbuildingblocksthatprovidetheanswerstothoseandotherquestions.Journalentrieslistvitaldata,suchashowmuchwascreditedanddebited,whenandfromwhichaccounts.Eachjournalentrycorrespondstoonediscretebusinesstransactionandiseventuallypostedtothegeneralledger. Thevalidityofallfinancialreportsareaffectedbytheaccuracy—orinaccuracy—oftheinformationenteredatthislevel. WhatIsaJournalEntryinAccounting? Eachjournalentrycontainsthedatasignificanttoasinglebusinesstransaction,includingthedate,theamounttobecreditedanddebited,abriefdescriptionofthetransactionandtheaccountsaffected.Dependingonthecompany,itmaylistaffectedsubsidiaries,taxdetailsandotherinformation. It’scrucialtoaccuratelyentercompletejournaldatasothatthegeneralledgerandfinancialreportsbasedonthisinformationarealsoaccurateandcomplete.Withmodernaccountingsoftware,recurringjournalentriesmaybetemplatizedandautomaticallyexecuted,minimizingthepotentialforerror. Journalentriesaremadeinchronologicalorderandfollowthedouble-entryaccountingsystem,meaningeachwillhavebothacreditandadebitcolumn.Evenwhendebitsandcreditsarelinkedtomultipleaccounts,theamountsinbothcolumnsmustbeequal.Forexample,sayacompanyspends$277.50cateringlunchforemployees.Theexpensesaccountincreasesbythatamount,whilethecashaccount,whichisanasset,decreasesby$277.50becausethatmoneyisnowspent. KeyTakeaways Ajournalisaconciserecordofalltransactionsabusinessconducts;journalentriesdetailhowtransactionsaffectaccountsandbalances. Allfinancialreportingisbasedonthedatacontainedinjournalentries,andtherearevarioustypestomeetbusinessneeds. Adjustingjournalentries,forexample,areusedtoaccrueordeferrevenueandexpenses,changeorcorrectpreviousentriesorestimatenon-cashtransactions,likeallowancesfordebtthathasbeenwrittenoff. WhatIsthePurposeofaJournalEntry? Thepurposeofajournalentryistophysicallyordigitallyrecordeverybusinesstransactionproperlyandaccurately.Ifatransactionaffectsmultipleaccounts,thejournalentrywilldetailthatinformationaswell. Forexample,sayourcateringpurchaseincursbothstateandlocaltaxes.Thatcompoundjournalentrymightlooklikethis: CateringforXYZCorp. Debit Credit Cash $277.50 Sale $250.00 Statetax $10.00 Localmealstax $17.50 Thus,thejournalenablesthecaterertoaccuratelyaccountfortaxesowedtomultiplejurisdictions. Journalentriesarethefoundationofeffectiverecord-keeping.Theyaresortedintovariouschartsofaccountsand,onceverifiedforaccuracy,postedtothegeneralledger,whichthenfeedsinformationtothefinancialreportsthatbusinessdecision-makersdependon. Accurateandcompletejournalsarealsoessentialintheauditingprocess,asjournalentriesprovidedetailedaccountsofeverytransaction.Auditors,bothinternalandexternal,willlookforentriesoradjustmentsthatlacktheproperdocumentation,explanationsorapprovalsorthatareoutsidethenormforthebusiness. WhatIsIncludedinaJournalEntry? Journalentriesmaycontainmultipledatapointsbutgenerallyinclude: Aheader,whichisadescriptoroftheentrytype,andthedateenteredinthejournal; Auniquenumericalidentifierorreferencenumber; Oneormoreaccountsandamountsthatwillbedebitedbythetransactionandthedate(s)thesedebitsaremade; Oneormoreaccountsandamountsthetransactionwillcreditandthedate(s)thesecreditsaremade;and Abriefdescriptionofthetransaction. Journalentriesmayalsoincludedataspecifictothebusiness,suchasthesubsidiaryorsubsidiariesinvolvedinthetransactionandthecurrencyorcurrenciesused. WhatAreDebitsandCredits? Debitsaddtoexpenseandassetaccountsandsubtractfromliability,revenueandequitybalances,whilecreditssubtractfromexpenseandassetbalancesandaddtoliability,revenueandequityaccounts. Inaccounting,thebasicprincipleisthesame:AnadjustingjournalentrytoaccountfortheaccruinginterestonabankloanwilldebittheInterestExpenseaccountandcredittheAccruedInterestPayableaccount. #1CloudAccountingSoftware FreeProductTour HowDoYouWriteaJournalEntry? MyToysManufacturingCo.buys$100,000worthofrawmaterials.Itpays$10,000incashandusescreditforthebalance.Thecompanywouldrecordadebit,orincrease,of$100,000inrawmaterials.TheCashaccountwouldshowacredit,ordecrease,of$10,000becausethatwastheamountpaidinthistransaction.TheAccountsPayableAccountwouldshowanincrease,orcredit,of$90,000asitnowowesthatamounttoavendoronafuturedateordates. AsMyToysmakespaymentsovertimeonthispurchase,theCashAccountwillshowacorrespondingcredit(lesscashisavailable)andtheAccountsPayableacorrespondingdebitaslessmoneyisowedbythecompany. Further,astherawmaterialsareusedtoproducefinishedproducts—toys,inthiscase—acreditisappliedtotheRawMaterialsaccounttoreflectadeclineinvalueasrawmaterialsareconsumed,andtheFinishedGoodsaccountisdebitedtoreflectanincreaseintheamountofinventoryonhand. 6TypesofJournalEntries Therearesixtypesofjournalentries,orsevenifyoucountthearchaic,vagueandseldom-usedsingleentry.Thesinglejournalentryisnotusedinstandardaccounting,whichisdouble-entrybased.Itismoresuitedtocheckbookbalancingthantobusinessaccounting,whichinvolvesmanyaccounts. Eachoftheprimarysixentrytypeshasaspecificfunctioninaccounting.Togethertheypresentabalanced,accurateandobjectivestatementofthecompany’sfinancialstanding. Theyare: Openingentries Theseentriescarryovertheendingbalancefromthepreviousaccountingperiodasthebeginningbalanceforthecurrentaccountingperiod.Forexample:TheendingbalanceoftheCashaccountonthebalancesheetfromthepreviousaccountingperiodwas$11,000afterallliabilitieswerepaidfortheperiod.Thatbalanceof$11,000isnowtheopeningentryforthecurrentaccountingperiod. Transferentries Transferentriesmove,orallocate,anexpenseorincomefromoneaccounttoanother.Forexample,MyToysManufacturingtransferscashfromitsmainaccounttoasubsidiary.Atransferjournalentryaccountsforthetransferofthemoneyfromoneaccounttoanother.Nothirdpartyisinvolvedintheseentries,andtransfersmustalwaysnetzero. Closingentries Theseentriesmarktheendofanaccountingperiodatabalancethatcanthenbetransferredfromatemporaryaccounttoapermanentone,orfromoneaccountingperiodtothenext.Inthecaseoftemporaryaccounts,theclosingentryzerosouttheaccount,andanybalanceabovethatistransferredtoanother,morepermanentaccount.Thetemporaryaccountisthenclosed. Examplesoftemporaryaccountsincludeexpenseandlossaccounts;revenue,incomeandgainaccounts;incomesummaryaccounts;anddividendorwithdrawalaccounts.Inthecaseofaccountingperiods,theclosingentryreflectstheendingbalanceforthataccountattheendofthataccountingperiod.Thatvalueisthentransferredastheopeningentryforthenextaccountingperiod.Inthatcase,itistheaccountingperiodforthataccount,whichisclosed. Adjustingentries Adjustingentriesareentriesthatrecordchangestoaccountsthatarenototherwiseaccountedforinthejournal,incompliancewiththeaccrualmethodofaccounting.Theseentriesareenteredinthegeneralledgerattheendofanaccountingperiodaspermatchingandrevenuerecognitionprinciples.Commonexamplesareaccruals,deferralsandestimates. Anexpenseaccrualreferstoanexpensereportedinanaccountingperiodbeforeitisactuallypaid.Anexampleiselectricityusedbyaplantinthemonthbeforetheutilityissuesabillforthecompanytopay. Arevenueaccrualrelatestoworkthathasbeenperformedorproductsthathavebeendeliveredbutforwhichthecustomerhasnotbeeninvoiced. Anexpensedeferraloccurswhenapaymentismadeinanaccountingperiodpriortowhentheexpenseisactuallyincurred.Anexampleisapaymentmadenowforinsurancethatcoversthefollowingsix-monthperiod.Deferredrevenueapplieswhenacompanyreceivespaymentsinadvanceforservicesorproductsthataretobedeliveredinthefuture. Compoundentries Theseentriesrecordmorethanoneaccounttobedebitedormorethanoneaccounttobecredited.Theruleofjournalentryrequiresthetotalofdebitsandcreditstobeequal,butthenumberofcreditsanddebitsdonothavetobeequal.Forexample,theremaybeonedebitbuttwoormorecredits,oronecreditandtwoormoredebits,oreventwoormorecreditsanddebits.Forexample,Payrollmayentailalargenumberofjournalentries,whichcanbesimplifiedintocompoundedformasasummary. Reversingentries Reversingentriesaremadeatthebeginningofanewaccountingperiodandservetoreverse,orundo,anadjustingentrymadeattheendofthepreviousaccountingperiod.Thisoptionprovidesasignificantreductioninaccountingerrorsduetodouble-countingexpensesorincomeandincreasesefficiencyinprocessingactualinvoicesinthenewaccountingperiod.Inotherwords,theyareusedtosimplifybookkeeping.Forexample,anaccruedexpensereportedinthepreviousaccountingperiodcanbereversedsotheexpensecanbeaccountedforintheaccountingperiodinwhichitwaspaid,withoutworryingaboutreportingtheexpensetwice. HowtoPrepareJournalEntriesforYourBusiness It’simportanttopreparejournalentriesproperlytoensuretransactionsareaccuratelyrecorded.Beginbydecidingwhattransactionmustbeenteredwhere.Ifyouuseaccountingsoftware,you’llneedtomakefewerjournalentriesbecauseautomationembeddedinthesoftwarewillflowrelevantdatatootheraccountsandreportsasneeded. Ifyouaredoingbookkeepingmanually,torecordatransactionproperly,you’llneedtofigureouteverythingthetransactionaffectsonthecompanybooks. Identifytheaccountsthatwillbeaffected:Thefirststepisinidentifyingtheaccountsthatthetransactionaffects.Thatcanbeabitconfusingifyou’reunfamiliarwithaccountingtermsandprinciples.Butingeneral,you’relookingforareasofimpactfromthetransaction:Whichaccountswillgainsomething,andwhichwilllosesomethinginthistransaction? Sorttransactionsfirst:Sortingtransactionsbytype—expenses,bankdeposits,quarterlytaxes—willputyouontherightpathtorecordingthesetransactionscorrectly. Followthemoney:Nowthatthetransactionissorted,thinkabouthowitaffectsthevalues,intermsofdebitsandcredits,inrelatedaccounts.Askyourself,Wheredidthemoneycomefrom,andwherediditgo?Whatdidthetransactionaddtothebusiness,andwhatdidittakeaway?Thephysicsadagethat“foreveryaction,thereisanequalandoppositereaction”holdstrueinaccounting,too.Makesureyouidentifyallactionsandreactionscausedbythetransaction. Determineyouraccounttype:Sometransactionsareeasytomapintermsofcreditsanddebitsinvariousaffectedaccounts.Othersmaybeabittrickier.Herearesometipstohelpyoufigurethemout, Getfamiliarwiththebasicaccounttypes:Alljournalentriesfallintooneofthebasicaccounttypes:Assets,Liabilities,Expense,RevenueandEquity.Onceyourecognizeeachofthesetypes,itwillbeeasiertounderstandwhateachentails,howtheyrelatetootheraccountsandhowdifferenttypesoftransactionsaffectthem. Usestandardaccountingrulestodirectwheretoapplycreditsanddebits:Accountingrulesexistforverygoodreasons,oneofwhichhappenstobestandardizingwhatgoeswhereinfinancialreportsandjournalentries.Looktotheaccountingrulesforthedefiningwordonwheretoapplydebitsandcreditsforanygivenjournalentry. Prepareyourjournalentry:Nowthatyou’veidentifiedthetransactiontypeandtheaccountsitaffects,you’rereadytomakeyourjournalentry. Enterthecorrectdate:Everyjournalentrymustbedatedtoensurethedataitcontainsisappliedtothecorrectaccountingperiod. Assigntheaccountnameandcode:Notetheaccountnameandtheuniqueidentifyinggeneralledgercode.Transactionsarecodedtospecificaccountsforreportingpurposes.Accountbalancesfeedthevariouslineitemsonfinancialstatements. Enterthedebitandcreditamounts:Ifyou’reusingaccountingsoftware,oddsarethatsomeofthecreditinganddebitinginajournalentrywillbeatleastpartiallyautomated.Ifyou’rekeepingthecompanybooksbyhand,you’llneedtodoublechecktoensureyouhaveenteredallcreditsanddebitsaccurately. ExamplesofCommonJournals Theaccepted,standardpracticeistouseadouble-entryaccountingsystem,whichgenerallyentailstheuseofbothageneralledgerandageneraljournal.Itcanalsoincludetheuseofspecialjournalsforfrequenttransactionswithinaspecificcategory. Generaljournal Ageneraljournalisabookofrawbusinesstransactionsrecordedinchronologicalorderbydate.Itisthefirstplaceatransactionisrecorded.Theamountsarethenpostedtotheappropriateaccountssuchasaccountsreceivables,cashaccountsorassetaccounts. Specialjournal Special,orspecialized,journalscontainfrequenttransactionswithinagivencategoryandarenormallyusedinmanualbookkeeping,tomakeiteasierforbusinessestofindinstancesofparticulartypesoftransactions.Examplesincludesalesandpurchasejournalsthatgroupsalestovariouscustomersorpurchasesfromsuppliersinoneplace.Modernaccountingsoftwarenegatestheneedforspecialjournalsbymakingiteasytosorttransactionsandsearchforgranulardetails. HowtoTrackJournalEntries Tomovedatatotheproperplaceinthegeneralledger,journalentriesmustbeeasilytrackablesotheinformationcanbefoundandcopiedasneeded.MultiplejournalentriescanberecordedandtrackedinT-accounts,whichhelpfinanceteamsvisualizeentriesforeasierreview. ExamplesofJournalEntries T-accountsareavisualrepresentationofthegeneralledgeraccount.Herearesomeexamples,aswellasadditionaljournalentrytypes. TwoT-accounts:Cashandnotespayable Cash(AssetAccount) DEBITIncreasesanasset/moneyreceived CREDITDecreasesanasset/moneypaid Date Accountname Debit Credit 1-Oct-20 CASH 10,000 Payable 10,000 NotesPayable(LiabilityAccount) DEBITDecreasesaliability/Loanpaid CREDITIncreasesanasset/Borrowedadditionalfunds NotesPayable(LiabilityAccount) DEBITDecreasesaliability/Loanpaid 10Oct20ENTRY10,000 CREDITIncreasesanasset/Borrowedadditionalfunds 9Oct20ENTRY20,000 1Oct20ENTRY10,000 Interestreceivablejournalentry Date Details Debit Credit 1-Nov-20 NorthernBank 12,000 To:InterestReceivable 12,000 *Interestincomeaccruedinpreviousmonth,receivedincurrentmonth Date Details Debit Credit 31-Oct-20 InterestReceivableNB 11,000 To:InterestIncomeNB 11,000 *Interestincomeaccruedbutnotreceived GeneralJournal Interestreceivablejournalentry Date Details Debit Credit Ref 1-Oct-20 Depreciation 10000 NS2020--400 Accumulateddepreciation *DepreciationOct2020 10000 1-Sep-20 Rawmaterials 2500 NS2020--300 Cash *Purchasetoymakingsupplies 2500 1-Aug-20 Utilities 500 NS2020--200 Cash *Mfgfacilityelectricity 500 1-Sep-20 Cash 20000 NS2020--100 Capital *VCinvestmentfornewtoy 20000 UsingAccountingSoftwareforTrackingJournalEntries Asaccountinggrowsincomplexityandjournalentriesgrowinnumber,trackingbecomesmoredifficult,especiallyinmanualentrysystems.Accountingsoftwareisabettersolutionforthemajorityofcompaniesbecausemuchoftheeffortaroundjournalentrytracking,pullingandallocatingtoaccountscanbeautomated. Automationdeliversincreasedefficiencyandreducederrorrates.Further,modernaccountingsoftwarewillgreatlyeasetheauditprocess. Journalentriesarethebackboneofallfinancialreporting.Assuch,transactionsmustbeverifiedandthecorrespondingjournalentriescross-checkedforaccuracy.Whetherthebooksarecompletedmanuallyordigitally,creditsanddebitsonaffectedaccountsmustbeallocatedaccordingtostandardaccountingrules. Fromthesesimplifiedbutexactingmeasures,acompanycanknowwhereitstandsfinanciallyandhowfaritcangowithfutureplans. InThisArticle WhatIsaJournalEntryinAccounting? KeyTakeaways WhatIsthePurposeofaJournalEntry? WhatIsIncludedinaJournalEntry? WhatAreDebitsandCredits? 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