A journal entry is an official record placed in a company’s trial balance. Ultimately, this entry places information into a set of financial statements. A journal entry is always composed of at least one debit entry and one credit entry. Depending on the underlying financial account, such as an asset, liability, revenue, expense, or equity account, the balance in an account may increase or decrease.
All journal entries must balance. This means all debits must equal all credits. If a $100 expense is being entered, this debit must be offset by a $100 credit in an account such as cash or accounts payable. In addition, a journal entry is accompanied by a journal entry date and a line description outlining the journal entry.
When to Use a Journal Entry
Manual journal entries should be entered in a few situations. The most common situation that arises is to correct an error. This adjusting entry typically reverses the balance in one account and places the balance in another. For example, if a $400 business flight was coded to the telephone expense account, an adjusting entry offsets the $400 in the telephone expense account and debits $400 to travel expenses.
A manual entry should only be used for unestablished accounting modules. For instance, if a depreciation module has not been established, a manual journal entry can be created. Interest revenue earned on external investments is entered in a journal entry along with certain tax entries, bad debt adjustments, and prepaid asset payments. Journal entries are used to record gains or losses on the disposal of assets.
Purpose of Manual Journal Entry
The purpose of a manual journal is to establish a journal entry that cannot be otherwise created. However, the introduction of online accounting software reduces the need for manual entries. For example, a voucher entry in an accounts payable module creates a journal entry. The user simply needs to identify the account to offset against a payable account. The module is established so the user can enter a number of transactions without having to manually write out the journal entry.
Impact of Online Accounting Software
The biggest impact of online accounting software is a series of internal control checks to validate information. Only authorized users can enter and post a journal entry. In addition, only certain valid account numbers can be entered. This is done by prepopulating the accounting software with all accounts and only permitting these accounts to be entered. All debits are automatically checked against credits, so no unbalanced journal entries can be posted.
Online accounting systems permit instant querying, filtering, reconciling, and financial reporting on the entries posted. These systems automatically tally each respective account and instantly calculate account balances. This is in stark contrast to handwriting journal entries and maintaining account balances on T-accounts. Another major benefit is the timing of entries; they can be posted in previous periods to reflect adjustments to older periods. Therefore, while journal entries are not for all situations, they do hold benefits in many situations.