Accounting entry definition
/What is an Accounting Entry?
An accounting entry is a formal record that documents a transaction. In most cases, an accounting entry is made using the double entry bookkeeping system, which requires one to make both a debit and credit entry, and which eventually leads to the creation of a complete set of financial statements. An accounting entry can also be made in a single entry accounting system; this system typically tracks only cash receipts and cash disbursements, and shows only those results needed to construct an income statement.
What is the Purpose of an Accounting Entry?
An accounting entry is needed to establish an accurate record of every business transaction. Without a complete set of accounting entries, an organization will not have sufficient information to construction a set of financial statements, and therefore no way to judge its financial performance or financial position. Accounting entries are also needed by an organization’s auditors; they cannot conduct an audit without having a complete set of financial records, and those records are created with accounting entries. In short, it is impossible for a business to create financial reports or have them audited unless they use accounting entries.
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Types of Accounting Entries
There are three primary types of accounting entries, which are noted below.
Transaction Entry
A transaction entry is the primary type of business event for which the accountant would create an accounting entry. Examples of accounting transactions are the recordation of an invoice to a customer, an invoice from a supplier, the receipt of cash, and the purchase of a fixed asset. This type of accounting entry is used under both the accrual basis and cash basis of accounting.
Adjusting Entry
An adjusting entry is a journal entry used at the end of an accounting period to adjust the balances in various general ledger accounts to more closely align the reported results and financial position of a business to meet the requirements of an accounting framework, such as GAAP or IFRS. This type of accounting entry is used under the accrual basis of accounting.
An adjusting entry can be used for any type of accounting transaction; here are some of the more common ones:
To record depreciation and amortization for the period
To record an allowance for doubtful accounts
To record accrued revenue
To record accrued expenses
To record previously paid but unused expenditures as prepaid expenses
To adjust cash balances for any reconciling items noted in the bank reconciliation
Adjusting entries are most commonly of three types, which are:
Accruals. To record a revenue or expense that has not yet been recorded through a standard accounting transaction.
Deferrals. To defer a revenue or expense that has occurred, but which has not yet been earned or used.
Estimates. To estimate the amount of a reserve, such as the allowance for doubtful accounts.
Closing Entry
A closing entry is a journal entry used at the end of an accounting period to shift the ending balances in all revenue, expense, gain, and loss accounts (known as temporary accounts) into the retained earnings account. Doing so empties out the temporary accounts, so that they can begin accumulating transactional information in the next accounting period.
How to Create Accounting Entries
Accounting entries for transactions are typically created through a transaction interface in the accounting software, so that you may not even realize that you are creating an accounting entry (such as, for example, when creating a customer invoice). If you are creating an adjusting accounting entry, then you will use a journal entry format (assuming that a double entry accounting system is being used). If you are closing the books at the end of an accounting period, the accounting software will likely create the closing entry automatically; you will not even see the entry.
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