A business runs on transactions, which can be traced through receipts or the creation of accounting forms known as source documents, such as sales slips and bills. Once a business transaction takes place, it triggers the accounting recording process.
This process turns transaction source documents into debits and credits in an accounting journal, thus making a journal entry. Journal entries are then used to create a company’s financial statements at the end of every accounting period.
This transfer of transactional information into the journals is at the core of accounting. The journal is where you capture the debit and credit entries to reflect a transaction or event of the company, which reflects its financial position.
There are single-entry journals and, the more widely used, double-entry journals. Double-entry accounting is the most accurate method for recording business transactions and balancing accounts. For this method to work, every transaction must be marked with a debited account and a credited account, which must equal the same amount.
The accounting cycle is the cycle that records and processes all financial transactions of a business. After the transaction takes place, there are seven steps needed to complete the cycle.
The first step in the accounting cycle is the entering of the transaction into the company’s journal.
The entries are written in a journal, also known as a book of original entry, as the recording process of information into the company’s formalized accounting system. A company can have any number of journals they want.
Typically there is a general journal for writing in miscellaneous transactions and then dedicated journals for specific types of entries. The most common journal that businesses will have is a sales journal. This sales journal is where all sale transactions will be recorded, such as sales, returns, credits, or anything to do with sales in general.
An inventory journal is another primary type of accounting journal. All transactions referring to the inventory are recorded here. Utility expenses are another basic journal entry, but one that is entered into the general entry book. Utilities are generally paid once a month, so they do not need an entire journal devoted to them.
The general journal is filled with entries where transactions are recorded and adjusted. On the other hand, a general ledger contains all accounts used by the company, which are directly affected by the journal entries.
We make journal entries in accounting to record, calculate, and analyze the company’s overall financial position. The financial information recorded in daily journal entries is gathered and summarized in the business’s financial statements at the end of each accounting period. These statements include a balance sheet, income statement, and cash flow statement.
So what’s included in a journal entry? Four things are needed for an entry to be complete.
These are as follows:
Below are two examples of journal entries, one to the general journal, and another to the sales journal:
There are various ways a business can revise their journal entries if a mistake has occurred in the books. Editing entries will also depend on when an error is caught, if it happens within the same day of entering and revising, businesses generally reconcile their accounts before close.
However, suppose the incorrect entry is caught sometime later. In that case, you won’t want to change it as it will disrupt all other reconciliations. Most people opt to track their errors and corrections in a subsequent entry to the one that needs revising, adding a note to the incorrect entry to see the revised entry.
Nowadays, thanks to accounting software, there is a function that allows for auto-reversing journal entries. This feature cuts out the human error and allows for complete accuracy for amending the books.
Suppose a company needs to pay an expense, possibly for its employees’ wages, out of their cash account. The journal entry for a wage expense should be recorded as a debit, while a credit would be adjusted to the cash account for the same amount.
Basic journal entries of a business include purchasing an asset, buying and selling of inventory, and paying the expenses in cash.
Accounting software now allows for the automation of journal entries, the scanning of receipts with your phone, and uploading it to your journal books. Connect all your accounts, organize receipts, automatically sort entries, track incomes and expenses with the QuickBooks expense tracker feature. Why not try it free today?
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