Journal Entries in Accounting Explained
Journal entries, also known as accounting entries, are a vital skill to learn in accounting. They are used to record transactions in a business's accounting system and are the foundation of the double-entry accounting method. If journal entries are not created properly, the financial statements and accounts of a business will not be accurate. They help to see where a business has been spending money and how much money has been coming into the enterprise. Understanding journal entries is important for bookkeepers, apprentice accountants, and business owners.
What journal entries are used for in accounting
Whenever a financial transition is made by a company, whether it has been paid money or spent money, the details of the transaction are recorded in an accounting system. The accounting system itself is known as a journal and the details of the transactions are called journal entries.
Many businesses now use accounting software to record journal entries, but many still prefer the old-fashioned method of writing them by hand. Journals can therefore be kept in either paper or digital forms.
What must be included in a journal entry?
Journal entries must contain relevant data that accurately reflects the nature of a transaction. The information contained in journal entries can be used to precisely track all monies coming into and going out of a business.
Each journal entry should include:
- The date of the transaction
- The name and number of all accounts impacted by the transaction
- The credit and debit amounts associated with the transaction
- A unique reference number
- A short description of the transaction and the reason why it was conducted
How to write a journal entry
All journal entries are recorded in accounts that relate to the nature of the transaction. Every business will have a list of its different accounts detailed in its chart of accounts. Each journal entry that is made has an effect on two different accounts, both in opposite ways. This is what is known as the double-entry accounting method.
Using the double-entry accounting method, all transactions have a credit and debit amount associated with them. All credits and debits recorded in the journal must balance when they are totalled up and included in financial statements such as the balance sheet at the end of the accounting cycle or fiscal year.
The double-entry accounting method works by using what is known as the accounting equation:
Assets = Liabilities + Shareholders’/Owner’s Equity
All credits are recorded in columns on the left of the journal and all debits are on the right. Debiting an asset account on the left side will increase the total of that account. Conversely, debiting a liabilities account on the right side will decrease the balance in that particular account. Credits have the opposite effect. Asset accounts balances are decreased by credits, liabilities account balances are increased by credits.
Using the accounting equation in combination with the crediting and debiting of accounts results in all account categories having a credit or debit balance.
Example of a journal entry
A kitchen supplies store purchased goods for the total of £500 on the 25th of January 2022. The accountant will write a journal entry that increases the debit balance of the inventory account and then writes a corresponding journal entry that decreases the credit amount in the cash account. This process is reversed when a customer buys a product from the store with journal entries being made in the relevant accounts.
How to track journal entries
As we mentioned earlier, the majority of businesses now use accounting software that automatically records and keeps track of journal entries during a certain time period. However, if you prefer to manage the accounts yourself, the below system can help you to track journal entries.
The method used to track journal entries is to create what is known as a t-account. A t-account has information on a particular account displayed in a T format. The name of the account sits on the top bar of the T and the vertical line of the T divides the credit and debit amounts. T-accounts act as a snapshot of the information contained in journal entries for accounts and are entered into the general ledger. The data contained in the general ledger is then used to create financial statements such as the cash flow statement, the balance sheet and the income statement.
Creating and tracking journal entries can be a complicated process, which is why many businesses use specialised accounting software like the Mooncard payment solution. Mooncard allows you to easily track all expenditures made on behalf of your business.
The Mooncard process of tracking expenditures couldn’t be simpler! Whenever a purchase is made using the Mooncard corporate card, the purchaser takes a digital photo of the receipt. The data from the receipt is then automatically entered into an expense report. The expense report is then sent immediately to your accounting department. The entire process is automated, accurate and instantaneous. You will never need to chase down expense receipts again! To see how the Mooncard payment solution works for yourself, visit the website to request a free, no-obligation online demonstration.