Journal Entry

What Is a Journal Entry?
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.


When & How Is a Journal Entry Used?
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.

RELATED TERMS

Account
Accounting Period
Adjusting Entries
Assets
Compound Entries
Credits
Debits
Double Entry
Equity
Financial Statements
General Ledger
Recurring Journal Entries
Reversing Entries
Subsidiary Ledger
T-Account
Transaction
Unbalanced Journal Entry

FAQ

What Are the Typical Features of a Journal Entry?
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


How Are Journal Entries Recorded?
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.


What Are Some Examples of Journal Entries?
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.


What Are the Different Types of Journal Entries?
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.


Do Journal Entries Involve Any Calculations?
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.