What is a journal entry in accounting?
Financial accounting is a multi-step process for businesses using double-entry methods. The first and most important step begins with a journal entry: recording financial information related to the transactions of the business or organization. This provides an audit trail to be examined and analyzed, in order to determine the financial position of an entity.
Since business transactions occur on a daily basis, keeping the log up-to-date and accurate for real-time transactions is imperative. Problems in the journal or journal entries that don’t add up create problems for any business. Fortunately, journal entries create a paper trail and a recording system that makes it easier to correct errors and prevent them from affecting the general ledger in the future.
What is a newspaper?
Journal entries take place in the company journal, which is often confused with the company ledger. The two are actually different. The journal is the very first record of financial information. It will later be part of the general ledger or another accounting ledger. The journal is the complete record of financial transactions, while the other books represent summaries of activity and account balances.
The journal is usually a physical record: an actual ledger, an Excel spreadsheet, or a series of transactions tracked in accounting software. Accountants periodically reconcile the journal to the general ledger throughout an accounting period.
What is a journal entry?
Everything that is recorded in the company journal is a journal entry. Journal entries typically include sales, expenses, cash flow, inventory, and payables, between other major treasury transactions:
- Accounts payable: Cash owed by the company
- Accounts Receivable: Cash owed to the company
- Equity: Retained earnings and owners’ investments
- Purchases: Cash payments to suppliers
- Received: Cash received by the company
- Sales returns: Cash issued as reimbursement
- Sales: Cash recorded on sales
Entries occur in real time, at the point of origin, to ensure accuracy and transparency in financial reporting. Each entry indicates the transaction data, the accounts involved and the amount of the transaction. This is important because an accountant will later reconcile these transactions with the general ledger using double-entry accounting.
An example of a journal entry
Because journal entries occur in real time, a business can see many journal entries in their journal before it is reconciled to the general ledger. Nevertheless, each entry is an important element in maintaining accounting transparency. Often, the accounting software manages the journal entries automatically, so accountants only process them to reconcile or audit them manually. This ensures accuracy, as journal entries are often pulled directly from sales software or sales platforms.
Examining journal entries is straightforward because the journal entries themselves are very straightforward. Usually, a traditional journal entry will only contain the essentials. For example, a business journal might look like this:
- March 23. Debit of $ 2,350. Invoice # 001
- March 23. Debit of $ 1,500. Invoice # 002
- March 24. Credit of $ 1,000. Invoice # 900
- March 24. Credit of $ 1,200. Invoice # 901
- March 25. Debit of $ 3,000. Invoice # 003
In this example, the business can reconcile their journal to the end of the week or the end of the month. In this case, it will use double-entry accounting to record each journal entry to the appropriate account in the general ledger. This reconciliation ensures the accuracy of cash flows and provides an auditing standard.
What is an adjustment journal entry?
While journaling helps businesses stay up to date on financial transactions, accrual accounting can lead to discrepancies, especially in companies that record hundreds or thousands of transactions every day. Unfortunately, some postings can cause turbulence when reconciled to the general ledger when a transaction begins in one period and ends in another. Accrual accounting dictates that transactions must be recorded in the same period. To take this into account, accountants will make an adjustment journal entry.
Adjustment journal entries are journal entries entered at the end of an accounting period, to account for transactions that may not be settled during the current period. This allows the company to progress in double entry bookkeeping. It also ensures that all transactions remain accounted for. The adjustment journal entry simply balances the transaction so that it can be properly reconciled. This is because companies go from cash accounting to accrual accounting and then reconcile that ledger entry accordingly.
The adjustment of journal entries is also corrective. For example, if there was an error in the previous posting period, an adjustment journal entry can correct it in the current period, to ensure financial transparency and accuracy in the future.
What is a closing entry?
A closing entry is a journal entry made at the end of an accounting period to zero temporary accounts and transfer their balances to permanent accounts. Indeed, it resets the accounts to zero so that the company begins the following period without a balance. Recording closing entries consists of debiting and crediting temporary accounts, moving journal balances to the income summary and then to the balance sheet.
Journal entries tell a story
Journal entries are the living record of a company’s financial transactions: both inbound and outbound. They leave behind an important audit trail when it comes to assessing the effectiveness of a company’s financial accounting practices. In addition, they help the company to keep track of its transactions and cash flow accordingly in the general ledger. To deepen your knowledge of investing and finance, sign up for the Investment U email newsletter below. You’ll also find invaluable stock tips and insights from some of Wall Street’s top experts on a daily basis!
Journal entries are an integral part of day-to-day business operations and are the stepping stone to quality accounting according to double-entry accounting standards. Large companies likely have multiple journals and a multitude of daily transactions, each focusing on the general ledger for better insight into the financial health of the business. In this way, journal entries are really the nuts and bolts of a company’s financial foundation.