What Is A Journal Entry?

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7-minute read

A journal entry is the first step—and an essential function—of the accounting process. Journal entries, which record economic and non-economic activities, are usually recorded in the general ledger or a subledger.  The general ledger is the foundation of financial reporting because it is used to create company financial statements.

How to Prepare a Journal Entry

Journal entries follow a standard format. A properly formatted journal entry will include the correct date, the general ledger accounts, the amount(s) to be debited, the amount(s) to be credited, a description of the transaction, and a unique reference number, such as a check number. Some companies may also require additional information such as company code, currency, profit center, or cost center.

What Are Debits & Credits?

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).

Assets = Liabilities +Stockholders or Owners Equity

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.

Types of Journal Entries

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.

Getting Data Into the General Ledger

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 Perils of a Manual Process

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 business.

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.

**What Solutions Do BlackLine Offer?
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Automating journal entries with accounting software offers an efficient solution to these problems. Opportunities exist for most processes.  According to a recent report from EY, opportunities exist to automate over 70% of journals.

BlackLine Journal Entry

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%.

BlackLine Intercompany Hub

The Intercompany Hub automatically creates journal entries on both sides of an intercompany transaction. This automatically incorporates transfer pricing, tax treatments, and foreign exchange rates. It also reduces the risk of the books for either company being out of balance.

Designed to work with enterprise resource planning (ERP) system, Journal Entry enables accounting professionals to create, review, approve, and electronically certify journals. By delivering digital innovations more quickly in a no-code environment, BlackLine reduces reliance on IT and gives business and accounting greater control over their information.

Best of all, these efficiencies allow accounting teams to engage in the high-level analytical and strategic thinking that is valuable to business decisions.

In today’s highly charged and rapidly evolving digital environment, businesses are increasingly pressured to make important data-based decisions quickly. In short, they need reliable information to stay competitive.

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

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