An Overview of Journal Entry
Journal entries are records of business transactions of a firm. These transactions are recorded in a book called a journal. These entries are the very first step in the accounting cycle. Journal entries follow double-entry bookkeeping, i.e., every transaction is recorded in at least two accounts.
Journal entries help in recording all accounting transactions in chronological order. This helps to prevent any further errors in the process. These entries are also helpful in the preparation of other financial statements.
Features of Journal Entries
Chronological - The journal entries are to be recorded date-wise and in a proper manner to prevent any errors.
Compound Entry Possible - In journal entries, transactions involving more than two accounts or related ones can be combined to form a single entry.
Assistant to Ledger - Journal entries serve as a base for all other books of account. The ledger is prepared from the journal entries.
Brief Explanation - Every journal entry has a brief explanation called narration to clarify in a better way.
Journal Entries Rules
Personal Account - A personal account is that of a person, company or an organisation. In this case, debit the receiver and credit the giver.
Real Account - Real account involves tangible and intangible items such as cash, bank, plant and machinery etc. In this case, debit what comes in and credit what goes out.
Nominal Account - This account is related to expenses, incomes, gains and losses. In this case, debit all expenses and losses and credit all incomes and gains.
Journal Entry Format
Basic Journal Entries
Journal Entry Examples
Pass the journal entries:
ABC traders started a business with a capital of Rs. 1,00,000 on April 10, 2021.
April 19, 2021 - Purchased furniture worth Rs. 75,000.
April 24, 2021 - Purchased goods on credit from XYZ traders worth Rs. 1,00,000.
April 30, 2021 - Rent paid Rs. 50,000.
May 2, 2021 - Goods sold for Rs.20,000 at 10% discount.
May 15, 2021 - Cash deposited Rs. 50,000 into the bank.
Journal Entries Problems
Though journal entries are an essential part of accounting, it has certain limitations.
Expensive - The recording of journal entries requires experienced staff, making it difficult for some business entities.
Bulky Records - When hundreds of transactions occur in the business, it is difficult to record every transaction.
Lacks Prompt Information - It becomes difficult for an accountant to locate a particular transaction immediately.
Repetitive Transactions - Though with different dates, many transactions involve debit and credit of the same accounts, making it a tedious task.
Conclusion
A business records its day-to-day financial transactions in a journal. All the transactions are recorded properly. In case proper rules are not followed in the preparation of a journal, the financial statements prepared will not represent a true and fair view of the business's financial position. Journal entries are useful to management, business entities, government, and tax authorities for making various decisions by timely providing necessary information. These entries can also be handled through specialised software to produce error-free financial statements.
FAQs on Journal Entries: Rules and Practical Examples
1. What is a journal entry?
Journal entry is a record of a financial transaction made in an organization's accounting journal. Each entry shows details like date, accounts affected, amounts, and descriptions, ensuring every transaction is properly documented under the double-entry accounting system for accuracy.
2. What is a good example of journal entry?
A good journal entry example is recording a cash sale. For example:
- Debit: Cash $500
- Credit: Sales $500
3. What is a simple journal entry?
A simple journal entry involves just two accounts: one debit and one credit. For instance:
- Debit: Supplies $200
- Credit: Cash $200
4. How to journal entry in accounting?
To make a journal entry in accounting:
- Identify the transaction
- Determine accounts to debit and credit
- Enter the date, amounts, and brief description
5. Why is a journal entry important?
A journal entry is important because it creates a clear record of every business transaction. This helps track financial operations, prepare financial statements, and maintain compliance, ensuring company finances are managed transparently and accurately over time.
6. What are the parts of a journal entry?
Each journal entry includes several parts:
- Date of the transaction
- Accounts debited and credited
- Amounts
- Narration or description
7. What is double-entry accounting in a journal entry?
Double-entry accounting means each journal entry affects at least two accounts, keeping the accounting equation balanced. For every debit, there is an equal credit. This method helps detect errors and maintain precise financial records using journal entries.
8. How does a journal entry impact financial statements?
A journal entry directly updates account balances, which are then reflected in the financial statements. Accurate entries ensure the balance sheet, income statement, and cash flow statement correctly show the company's financial position and performance.
9. What is the accounting equation used in journal entries?
The accounting equation is Assets = Liabilities + Equity. Every journal entry must keep this equation balanced. For example, if you buy equipment with cash, assets increase and cash decreases, so the accounting equation remains equal.
10. Can a journal entry affect more than two accounts?
Yes, a compound journal entry can involve more than two accounts, with multiple debits and credits. This is useful for complex transactions, like payroll, where salaries, taxes, and deductions may all be recorded in one entry.
