Journal entry definition
/What is a Journal Entry?
A journal entry is used to record a business transaction in the accounting records of a business. These entries are essential for the proper recordation of transactions, so that an organization can issue accurate financial statements at the end of each reporting period. Without journal entries, it would be impossible to judge the financial performance or financial position of a business.
Understanding Journal Entries
The logic behind a journal entry is to record every business transaction in at least two places (known as double entry accounting). For example, when you generate a sale for cash, this increases both the revenue account and the cash account. Or, if you buy goods on account, this increases both the accounts payable account and the inventory account. This approach is essential for double-entry accounting, so that both an income statement and a balance sheet can be produced for a business.
Where is a Journal Entry Recorded?
A journal entry is usually recorded in the general ledger; alternatively, it may be recorded in a subsidiary ledger that is then summarized and rolled forward into the general ledger. The general ledger is then used to create financial statements for the business.
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What is Included in a Journal Entry?
The structure of a journal entry contains the following elements:
A header line may include a journal entry number and entry date.
The first column includes the account number and account name into which the entry is recorded. This field is indented if it is for the account being credited.
The second column contains the debit amount to be entered.
The third column contains the credit amount to be entered.
A footer line may also include a brief description of the reason for the entry.
Thus, the basic journal entry format is:
| Debit | Credit | |
| Account name / number |
$xx,xxx | |
| Account name / number |
$xx,xxx |
The structural rules of a journal entry are that there must be a minimum of two line items in the journal entry, and that the total amount you enter in the debit column equals the total amount entered in the credit column.
A journal entry is usually printed and stored in a binder of accounting transactions, with backup materials attached that justify the entry. This information may be accessed by the external auditors as part of their year-end investigation of a company's financial statements and related systems.
Types of Journal Entries
There are several types of journal entries, which are noted below:
Adjusting journal entry. An adjusting entry is used at month-end to alter the financial statements to bring them into compliance with the relevant accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards. For example, you could accrue unpaid wages at month-end if the company is on the accrual basis of accounting.
Compound journal entry. A compound journal entry is one that includes more than two lines of entries. It is frequently used to record complex transactions, or several transactions at once. For example, the journal entry to record payroll usually contains many lines, since it involves the recordation of numerous tax liabilities and payroll deductions.
Reversing journal entry. A reversing entry is typically an adjusting entry that is reversed as of the beginning of the following period, usually because an expense was to be accrued in the preceding period, and is no longer needed. Thus, a wage accrual in the preceding period is reversed in the next period, to be replaced by an actual payroll expenditure.
Journal Entry Best Practices
It can be difficult to prepare journal entries in an efficient manner, as well as to document them properly. Here are several best practices for using them:
Do not use for high-volume transactions. In general, do not use journal entries to record common transactions, such as customer billings or supplier invoices. These transactions are handled through specialized software modules that present a standard on-line form to be filled out. Once you have filled out the form, the software automatically creates the accounting record. Thus, journal entries are not used to record high-volume activities.
Use a journal entry template. When you create the same journal entry on a recurring basis, it makes sense to set up a template for it in the accounting software. This template contains the accounts normally debited and credited, so that you can easily fill it out when creating a new entry. The use of templates is not only efficient, but also reduces errors.
Set a retention policy. Journal entries and attached documentation should be retained for a number of years, at least until there is no longer a need to have the financial statements of a business audited. The minimum duration period for journal entries should be included in the corporate archiving policy.