Journal entries are the building blocks of an organization’s accounting system. All systems, whether they are paper-based, completely automated, or a hybrid of the two, are predicated on journal entries.
Journal entries record all transactions for a business. Transactions are broadly defined as any financial activity that impacts the business.
They are not limited to the buying and selling of goods and services, but include any exchange of monetary value, such as interest payments, depreciation, expenses, or payroll.
The data that is contained within a journal entry provides the necessary information to document and later evaluate or analyze transactions. Collectively, journal entries are used to produce summary documents that support analysis and evaluation of the business and its finances.
The accuracy and consistency of journal entries will impact the ability of the accounting team to assign transactions to the appropriate account, and to monitor and make proper assessments of financial activity for the business.
Journal entries are used to prepare budgets and other documents for accounts and departments and for the business overall.
These documents help track financial performance, comply with regulations and tax audits, and detect fraud and waste.
They are audited by government agencies, accountants, other businesses, and investors to evaluate the overall financial health and performance of the business.
Journal entries are typically entered in the general ledger or subsidiary ledgers. They contain important information about individual transactions, including the date, amount, purpose, payee or payor, and the accounts to which the transaction should apply.
The general ledger is the master document which provides a complete record of all the financial activity for the company. Information in the general ledger is used to produce financial statements for the company.
The financial statements are produced at regular intervals, also known as accounting periods.
They are often produced on a monthly basis, but they may be generated at other intervals, such as weekly, quarterly, or annually.
Items in the general ledger may reference an accumulation of entries for a similar purpose or accounts that are grouped together in what is referred to as a subsidiary ledger. A subsidiary ledger groups together accounts with a common purpose to make the general ledger cleaner and easier to manage.
Accounting systems use the double entry system to record journal entries. According to this system, which has been widely used for centuries, every transaction impacts at least two accounts, so a journal entry will always have a debit and a credit in the ledgers where they are recorded. All double entries should balance out.
They are based on the equation: Assets = Liability + Equity.
Assets are defined as any resource with monetary value. The company’s assets reflect its overall financial health and profitability. There are many different types of assets, such as short-term assets which can be quickly converted to cash. Long-term or fixed assets, like equipment and buildings, cannot be easily converted to cash.
Liability is something the business owes to an individual, business, or other entity.
Equity refers to the net worth or value of a company. It is expressed in the form of the equation as the difference between a company’s liabilities and its assets.
A journal entry will be listed as a credit if it is recording an amount to be received by the company—simply, money coming in. It is always recorded in the right-hand column of the ledger.
A debit is defined as what is due or owed—money going out. Journal entries that record a debit are always entered in the left-hand column of the ledger.
A T-account is an informal term for a set of financial records that uses double-entry bookkeeping. The term describes the appearance of the bookkeeping entries which resemble a large T.
The title of the account appears above the top horizontal line of the T with debits listed on the left and credits listed on the right side of the vertical line of the T.
Preparing a journal entry is a crucial task in maintaining accurate financial records.
A properly prepared journal entry ensures that all transactions are recorded systematically and correctly.
Here’s how to prepare a journal entry:
Components of a Journal Entry
A standard journal entry includes several key components:
Date: The date when the transaction occurred.
Accounts: The names of the accounts affected by the transaction.
Debit Amount: The amount to be debited.
Credit Amount: The amount to be credited.
Description: A brief description of the transaction.
Reference Number: A unique identifier for the transaction, such as a check number or invoice number.
Additional Information: Some companies may require additional details such as company code, currency, profit center, or cost center.
Identify the Transaction: Determine the transaction that needs to be recorded. Transactions can include sales, purchases, expenses, interest payments, or any financial activity that impacts the business.
Determine the Accounts Affected: Identify which accounts will be impacted by the transaction. For instance, a sale might affect the Accounts Receivable and Sales Revenue accounts.
Classify the Transaction: Decide whether the accounts will be debited or credited. Remember the basic accounting equation: Assets = Liabilities + Equity. Debits increase asset or expense accounts and decrease liability or equity accounts. Credits decrease asset or expense accounts and increase liability or equity accounts.
Enter the Date: Record the date of the transaction. Ensure the date is accurate to maintain a correct timeline of financial activities.
Record the Debit Amount: Enter the debit amount in the appropriate account. This amount should be recorded in the left-hand column of the ledger.
Record the Credit Amount: Enter the credit amount in the appropriate account. This amount should be recorded in the right-hand column of the ledger.
Provide a Description: Write a brief description of the transaction. This helps in understanding the nature of the transaction during reviews or audits.
Assign a Reference Number: Allocate a unique reference number to the journal entry. This could be a check number, invoice number, or any identifier that makes tracking the entry easier.
Review the Entry: Double-check the journal entry to ensure that the debit and credit amounts are equal and that all necessary details are included. Any discrepancies should be corrected immediately.
Post to the Ledger: Post the journal entry to the general ledger once reviewed. This step is crucial as it updates the company’s financial records.
Most organizations adhere to the double entry accounting system.
According to this system, every transaction impacts at least two accounts, so a journal entry will always have a debit and a credit in the ledgers where they are recorded.
The totals of the debits and credits for any transaction must always equal each other, so that the journal entry is “in balance.”
To prepare a journal entry, an accountant must determine the correct accounts to enter the debit and credit.
In accounting, the process is complicated due to the various types of accounts where these transactions are recorded. For example, debits can represent the increase of an asset or expense account or a decrease in equity, liability, or revenue.
Credits may represent an increase in an equity, liability, or revenue account, or they may decrease an asset or expense account.
Here are some examples: if a business makes a sale on credit, the transaction would be recorded as a debit in an accounts receivable account and as a credit in the sales account. A debit would increase the accounts receivable account (asset) and a credit would increase the sale account (revenue).
When a business takes out a loan, the transaction will be recorded as a debit to the cash account and a credit in the loans payable account. A debit would increase the cash account (asset) and a credit would increase the loans payable account (liability).
Debits and credits add or subtract from the total for the corresponding account in which they are entered.
For consistency and ease of identification, debits are always entered in the left-hand column, while credits are always entered on the right.
In the double entry system, debits and credits always add up. If one column does not add up to the other, then the ledger is considered unbalanced.
Another way to express this rule is with this equation: assets = liabilities + stockholders or owner's equity.
In this equation, assets are the resources owned by the business. Liabilities are the amounts the business owes. Equity is the amount invested plus net income minus withdrawals. This equation should always be in balance.
Several basic elements make up a journal entry:
The date of the transaction records when it occurred
Account names and numbers indicate where the transaction will be recorded
Amounts reflect what is to be credited and what is to be debited
Entries also have a unique reference number and a brief description
Business transactions are usually recorded in two places. This is known as the double entry bookkeeping system, which is based on the concept that every transaction has an equal and opposite effect in two different places. For example, a purchase increases the company’s assets in terms of the value of the item acquired, but it also creates a debt in terms of the cash that must be paid for the item.
According to the double entry system, debits are recorded in the left-hand column of the ledger, and credits are recorded in the right-hand column.
To effectively track journal entries, utilize accounting software to automate and update records in real time, ensuring entries are recorded chronologically in the general ledger. Assign unique reference numbers and attach supporting documentation for easy retrieval and verification.
Regularly reconcile accounts to identify discrepancies, maintain an audit trail of modifications, and implement a systematic review and approval process to ensure accuracy and compliance. These practices will help maintain the integrity and accessibility of your financial records.
There are many different types of journal entries. For example, the journal entry for an item that has been sold on credit will record the value of the sale as a debit in the accounts receivable and as a credit in the sales account.
If the item has been sold for cash, the journal entry will appear as a debit in the cash account instead of the accounts receivable account. It will still appear as a credit in the sales account.
In the case of payroll, a journal will record the transaction as a debit in the wage expenses account and as a credit in the cash account.
Journal entries are required for all transactions in the business, so there are a variety of entries that can be made.
Examples of types of journal entries include adjustments to net revenues, recording accrued expenses [such as payroll, inventory, or other supplies], amortization of prepaid expenses, recording depreciation and amortization, and recording a borrowing or repayment on a loan.
When a business purchases supplies for cash, accountants will enter the transaction as a debit in the supplies expense account and as a credit in the cash account.
If an organization purchases inventory on credit, the transaction will be entered as a debit in the inventory account and as a credit in the accounts payable account.
In both examples, the journal entries increase and decrease the corresponding accounts accordingly. Following the double entry system, they always add up.
Consider another unique example. Journal entries may also represent depreciation, which is the loss in value over time of a particular asset, like computer equipment.
Depreciation would be entered as a debit in the depreciation expense ledger and as a credit in the accumulated appreciation account.
There can be more than one kind of journal entry:
Adjusting entries are made at the end of an accounting period to record transactions that were not recognized during the period, such as accrued or deferred expenses, or to correct a mistake from the previous period.
Compound entries reflect a transaction that has more than two lines, like a purchase that involves cash and a loan.
A recurring journal entry is one that repeats in every reporting period for such expenses as monthly rent or depreciation on an asset.
Reversing entries cancel entries from the previous reporting period.
An unbalanced journal entry occurs when the debit and credit do not add up. This will have to be corrected before the financial statements are finalized.
According to the double entry bookkeeping system, every transaction has an equal and opposite effect in at least two different places. According to this logic, every double entry should balance out. This is expressed in the form of the equation: Assets = Liability + Equity.
Making journal entries in the general ledger account can be a time-consuming and labor- intensive process. It involves repetitive, manual work, long processing times, and little visibility.
The typical manual process comprises multiple steps with human intervention at every stage along the way, including manual data capture, manipulation and formatting, reconciliations and allocations, validations, and numerous other confirmation steps.
Spreadsheets, emails, and hard copy files are commonly used tools for most operations.
Making matters more challenging, much of this is done at the end of the monthly accounting cycle, creating a backlog and a time-crunch at period close.
The manual process is also fraught with risk and error. Spreadsheets do not validate important information. The data is only as good as it is entered. Many errors may go unnoticed and uncorrected.
Supporting documentation, which is stored separately and in varying format, such as emails and hard files, may be difficult to find and sort through. Transaction approvals require multiple emails and review.
Typically, accounting teams dive headlong into this process at month's end to reconcile entries and accounts.
All the above is labor intensive and unreliable, and every point in the process is susceptible to error and fraud. The number of journal entries that companies post each quarter range from hundreds for a small business to thousands for larger businesses.
Large companies can have a single entry with more than 20,000 line items. With this magnitude of transactions, the inefficiencies grow exponentially.
A system with weak controls is also susceptible to fraud. The Association of Fraud Examiners found that 27% of fraudsters created fraudulent journal entries.
Ready to streamline your journal entry processes and improve efficiency? Dive into our whitepaper on automating journal entries for expert insights.
This solution modernizes the journals experience by providing accuracy and control with improved efficiency at every step of the process.
It replaces specific manual journal tasks with targeted automation.
BlackLine Journal Entry allows accountants to automatically run and extract transactional detail from their source system.
This provides a complete journal entry management system that enables accountants to create, review, and approve journals, then electronically certify and store them with all supporting documentation. Having centralized information allows for easy access and audits.
BlackLine uses intelligent controls, approval routing, and segregation of duties. Journals can be posted to the general or sub-ledger systems with pre-posting validation to catch entry or logic errors, eliminating ledger rejections.
Automation rules allow period-end journal entries to be created and populated based on data and posted automatically, considerably reducing manual period-end work.
By automating journal entries, organizations have cut time and effort around journal entry processing by as much as 90%.
Request a demo with us and see how you can centralize, manage, and automate journal entries with Journal Entry Automation & Management Software.
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