What are accounting journal entries?
Journal entries are by far one of the most important skills to master in an accounting career. If proper journal entries were not made, companies’ financial statements would be inaccurate and a complete mess. Read more about commerce course in Ahmedabad.
Think of journal entries in terms of Isaac Newton’s third law of motion, which states that every action has an equal and opposite reaction. As a result, when there is a transaction in a company, at least two accounts must be affected in different ways.
For example, if a company purchases a car, the value of the car is added to the company’s assets. However, there must be a separate account that changes (i.e., the equal and opposite reaction). The other account that has been impacted is the company’s cash, which has decreased because the cash was used to purchase the car.
Finally, just as the forces on the first object must be equal to those on the second, the debits and credits of each journal entry must be equal.
What is the purpose of journal entries?
When business transactions are recorded in accounting journals, they are posted to the general ledger. Consider “posting” to be “summarising,” because the general ledger is just a list of all your journal entries.
Your general ledger serves as the foundation for your financial reporting. It’s used to create financial statements such as your income statement, balance sheet, and (depending on the accounting method you use), cash flow statement.
Financial statements are essential for tracking your company’s performance and correctly filing your taxes. They allow you to see how your business is performing at a glance.
How to Handle Journal Entries
A journal is the official book of the company in which all transactions are recorded in chronological order. Although many businesses now use accounting software to book journal entries, journals were once the primary method of doing so.
The debits and credits in each journal entry must be equal to ensure that the accounting equation (assets = liabilities + shareholders’ equity) remains balanced. When writing journal entries, we must always keep four things in mind:
Which accounts will be impacted by the transaction?
Determine whether each account’s balance has been increased or decreased.
Determine the amount of change for each account.
Make certain that the accounting equation remains balanced.
Practice is the best way to master journal entries. Here are a variety of examples of common journal entries. The first example is a step-by-step walkthrough of the procedure.
Examples of Journal Entries
The specific journals you use for bookkeeping will be determined by the type of business you run. They are divided into two categories: general journals and special journals.
The general journal contains entries that do not fit into any of your special journals, such as interest income or expenses. It can also be used to keep track of adjusted entries.
Special journals, also known as accounts, are used in your accounting system to record common, day-to-day transactions. Your chart of accounts contains a list of all of your special journals.
Example 1: Journal Entry for Borrowing Money
ABC Company obtained a $300,000 bank loan.
Cash (asset) and bank loan payable are the accounts that are affected (liability).
Cash is increasing because the company is receiving cash from the bank and bank loan payable is increasing because the company’s liability to repay the bank at a later date is increasing.
The sum at issue is $300,000.
At A = L + SE, where A is increased by 300,000 and L is also increased by 300,000 to maintain the accounting equation.
As a result, the journal entry would be as follows:
DR 300,000 USD in cash courtesy of DR
CR Bank Loan with a Payable Amount of $300,000
Example 2: Journal Entry for Purchasing Equipment
Equipment was purchased for $650,000 in cash.
650,000 USD for Disaster Relief Equipment
Cash of 650,000 CR
Example 3: Inventory Purchasing Journal Entry
purchased $90,000 in inventory for $10,000 in cash and the remaining $80,000 on the account.
90,000 in the DR Inventory.
Cash of 10,000 CR
80,000 in Accounts Payable (CR)
Example 4: Land acquisition journal entry
The land cost $50,000, and the buildings cost $400,000. I paid $100,000 in cash and signed a note for the balance.
Land for 50,000 DR
400,000 for DR Structures
Cash of 100,000 CR
CR Note payable in the amount of $350,000
Making changes to journal entries
If you use accrual accounting, you must make adjusting entries in your journals once a month.
Adjusting entries ensure that expenses and revenue for each accounting period are consistent, resulting in an accurate balance sheet and income statement. To learn how to do it yourself, read our article on adjusting journal entries.
How to Keep Track of Journal Entries
Financial reporting is an important aspect of accounting. Putting a company’s financial statements in front of people who need to know them so they can make better financial decisions is called “financial reporting.”
Multiple journal entries are recorded and tracked in an account called a T-account, which is a visual representation of a general ledger account, to figure out how much money each account on the company’s financial statements costs at the end of the year.
Why Do Journal Entries Matter to Me and My Accounting Career?
Even though recording journal entries can be time-consuming and repetitive, businesses need to make sure they record the right entries at the right time to show their true financial status to both internal users and people outside of the company.
Companies with inaccurate entries may appear to have more or less debt, or to be more or less profitable, than they actually are. So, businesses and investors may make decisions based on false or misleading information, which could have bad consequences.
Having the ability to record and understand journal entries is essential in any accounting career, whether you work in public practise and are working on a client’s audit file, or you work in industry and are assisting in the preparation of a company’s financial statements. If you are looking for tally prime course in Ahmedabad, simple visit – s20.in for more information.
In layman’s terms, the first step toward proper financial reporting is to record accurate journal entries.
