Wajiha Danish | November 2 2022
Journals are known as the backbone of accounting. They are the records of the financial operations of the business. These entries can be recorded manually or by using accounting software. Subsidiary ledgers are used if the entries are recorded manually, and if they are registered with the help of accounting software, they go straight into a general ledger (G/L).
So, what are journals in accounting, and why are they known as a necessity for any kind of business? Let’s find out.
One of the most essential jobs of a business owner is the maintenance of records. This is done by recording the journal entries.
If you have an idea about accounting terms, then you would know that journal entries are basically records of financial transactions. Making a journal entry is the most basic step of an accounting cycle and the most important as well, as any kind of error will affect the business adversely.
It is immensely important to know what is a journal entry and how to create it. Accounting journal entries follow the double-entry method and each journal entry always has a debit and a credit entry.
It is important to understand the parts of a journal entry as they are the foundation of bookkeeping. The simplest form of journal entry comprises a single debit and a credit entry. Journal entries have dates and also include the description of the said transactions.
Here are the parts of a journal entry dissected separately for your better understanding:
A date is a must for the said transaction in the journal. The date would be when the transaction was made, not when it was recorded in the journal.
This description defines the purpose of the journal entry.
This showcases the account numbers of the accounts which are debited or credited in the general ledgers. This is filled out when the journal entries are recorded respectively to their ledger accounts.
These are the columns that define the affected accounts of the transactions. The credited entries are always placed on the right side, whereas the debit entries are listed on the left side of the journal.
The entries have a unique serial number of their own if they are made manually. If accounting software is used, then a unique number is assigned to each journal entry automatically.
The very first step while preparing journal entries is to determine what transaction is to be entered in the journal.
If you are using accounting software, all the entries will be made into the software, and you will have to enter the month-end adjustment entries like the reconciliation of the bank accounts or the journal entry of payroll accrual.
Here are the steps on how to prepare the journal entries:
Before making a journal entry, you have to determine what account in the general ledger will be affected by the entry. It would be best if you sorted out your transactions first.
For example, if you have bank deposits, sales, and expenses, it makes recording the entries easier if you sort them out according to the transactions.
You need to determine which account will be debited and which will be credited. The standard accounting rules will apply here, i.e., if you have purchased something, it will go into the expense account, which means you will have to debit the account, and it will be vice versa in the case of a credit account.
According to the accounting standards, the type of accounts is assets, liabilities, revenue, expense, and capital. All the entries fall in any one of these accounts.
Once you have identified the accounts and also determined the type of the accounts for the journal entry, you are ready to record it.
First, you need to write the journal entry date and ensure that it is correct. Now you have to record the G/L number along with the account category.
For instance, if you are making a journal entry about the purchase of office supplies, then the office supplies will be debited from the expense account and will be credited from the cash account.
The main purpose of a journal entry is to record every transaction of the business accurately and properly through digital or physical means. Complete and accurate journals are very crucial for the business as they play an important role in the auditing process of the business.
If a transaction affects multiple accounts, the journal entry must have these details mentioned. If these details are missing, this can lead to errors in the auditing process in the form of adjustments and misleading information.
Journal entries can be recorded as a single entry or a compound one. A single journal entry will have only one debit and one credit entry, whereas a compound entry will have more than one entry.
Regardless of whether the journal entries are single or compound, having an equal total at both the debit and credit end is necessary. The key to balancing the debit and credit entries is to know how much the debit and credit have affected an account.
Mastering the art of journal entries is a must for an accountant. Thanks to the latest accounting software, the workload has been reduced as the day-to-day entries are automatically generated; still, small business owners must clearly understand the journal entries and how they work as their accuracy or inaccuracy directly affects the financial reports of the business.
Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.