January 03, 2020

What Is A Journal Entry?

What Is A Journal Entry? Image | BlackLine Magazine

2-minute read

A journal entry records a business transaction and is the first step of the accounting cycle. Journal entries should be made for every business transaction and are posted to the general ledger.

A properly documented journal entry consists of the following:

  • Correct date
  • Amount(s) that will be debited
  • Amount that will be credited
  • Description of transaction
  • Unique reference number (i.e. check number)

Preparing accounting journal entries is a normal activity for accountants. Most companies use a double-entry accounting system, meaning that every financial transaction impacts at least two accounts. One account is debited, and one account is credited. A proper accounting journal entry has equal debit and credit amounts.

How To Prepare A Journal Entry

To prepare an accounting journal entry, one must first determine which account(s) to debit and which account(s) to credit. The easiest way to do this is to use this basic accounting equation:

Assets = Liabilities + Stockholders or Owners Equity

Assets are booked on the debit or left-hand side of the entry. Liabilities or equity accounts are booked on the credit or right-hand side of the entry. To increase one of these balance sheet accounts, the entry is recorded on the same side as it is noted in the equation above. To decrease a balance sheet account, record the entry on the opposite side as it is noted in the equation.

For entries that impact income statement accounts, the general rule of thumb is that revenue accounts normally have a credit balance (right side) and expense accounts normally have a debit balance (left side).

The Perils of A Manual Process

Historically, journal entry and verification processes have been manual and tedious. Journal entries are often prepared on spreadsheets, and that file is then emailed along with supporting documentation to the approving manager. Once approved, the document is posted to the general ledger―sometimes by a third person.

The number of journal entries that companies post each quarter range from hundreds to thousands, and larger companies can have a single entry with more than 20,000 line items. Envision entering data of this volume into a spreadsheet or general ledger and imagine how time-consuming that would be.

This is the way it’s always been done: an inefficient, email-driven process with constant, unnecessary delays.

This manual process exposes companies to the unnecessary risk of fraud and human error. Spreadsheets don’t validate key information such as account numbers, and without validation rules in place, entries that were booked incorrectly may not be caught. Supporting documentation is often a hard copy stored in a file or binder that can be hard to find when an auditor asks to review the entries.

What Solution Does BlackLine Offer?

BlackLine Journal Entry modernizes the journals experience by providing advanced accuracy and control with improved efficiency at every step of the process. The solution provides a complete journal entry management system that enables you to create, review, and approve journals, then electronically certify and store them with all supporting documentation.

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.

Watch this webinar to learn how organizations like yours have cut time and effort around journal entry processing by as much as 90%.

Other Resources:

Michael Shultz
Director of Finance Transformation

Modern Accounting