“Journal Entries are not done properly” are the statement that frequently we hear in the industry from CAs / CPA / Book Keepers that employees didn’t do a proper entries etc. What does it mean? How is “Journal Entries” are important? What happens in an ERP and why you need to manually do the Journal Entries?

Journal Entries can be explained in a rough way like keeping files in a group for a reporting purpose.

Let’s understand more on this.

What is a Journal?

In the world of accounting, a journal serves as a chronological record of financial transactions. It provides a detailed account of the company’s daily activities, such as Sales, Purchases, Expenses, and Receipts. Journals are essential for maintaining accurate financial records and serve as the foundation for creating financial statements.

What are Journal Entries?

Journal entries are the specific entries made in the journal to record each transaction. They follow a standardized format known as the double-entry system, which ensures that each transaction is properly recorded. A journal entry typically consists of the date, the accounts affected, a brief description, and the corresponding debit and credit amounts.

For example, let’s consider a sale of products worth $1,000: Date: 15th June 2023

Description: Record sale of products

1. Accounts Receivable (Debit) – $1,000
2. Sales Revenue (Credit) – $1,000

What are DEBITs and CREDITs?

This is a basic question in the Accounting and have seen many miss this.

Debit and Credit are fundamental terms used in accounting to record financial transactions. They are used to track and summarise the flow of money within an organization or an individual’s financial activities. Here’s a brief explanation of debit and credit:

1. Debit: In accounting, debit refers to the left-hand side of an account. It represents an increase in assets, expenses, or losses, and a decrease in liabilities, equity, or income. When a transaction is debited, it means that an amount is being added to the account.

Examples of debit transactions:

• Cash received from a customer
• Purchase of inventory on credit
• Payment made to a supplier
• Increase in an expense account like rent or utilities

2. Credit: Credit, on the other hand, refers to the right-hand side of an account. It represents an increase in liabilities, equity, or income, and a decrease in assets, expenses, or losses. When a transaction is credited, it means that an amount is being recorded on the credit side of the account.

Examples of credit transactions:

• Sales made on credit
• Loans received from a bank
• Owner’s investment in the business
• Increase in income accounts like sales or interest earned

It’s important to note that every financial transaction has two sides—an equal debit and credit. This is known as the double-entry accounting system, which ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

In summary, debit represents increases in certain accounts and decreases in others, while credit represents the opposite. The specific accounts affected depend on the nature of the transaction and the account classification in the accounting system.

Why do you need to enter Journal Entries in Accounting?

Entering journal entry is crucial for maintaining accurate and reliable financial records. It allows businesses to track and analyze their financial transactions, ensuring compliance with accounting principles and regulations. Journal entries provide a clear audit trail, aid in financial analysis, facilitate the preparation of financial statements, and support informed decision-making.

Journal Entry Examples

a. Accounts Payable Journal Entry: Date: 10th June 2023

Description: Record purchase of supplies on credit

1. Accounts Payable (Debit) – $500
2. Purchase (Credit) – $500

b. Purchase Journal Entry: Date: 20th June 2023

Description: Record purchase of inventory on credit

1. Inventory (Debit) – $1,200
2. Accounts Payable (Credit) – $1,200

c. Interest Received Journal Entry: Date: 5th June 2023

Description: Record interest received from a bank deposit

1. Cash (Debit) – $300
2. Interest Income (Credit) – $300

What are basic Accounting Journal entries?

Basic accounting journal entries refer to the fundamental journal entries that capture the most common financial transactions of a business. These entries include recording sales, purchases, expenses, payments, receipts, and other routine transactions. By accurately entering these basic accounting entries, businesses can maintain an up-to-date and accurate financial record.

What is the difference between a journal and a ledger?

While both a journal and a ledger are important accounting tools, they serve different purposes.

A Journal is a chronological record that captures all Financial transactions in the order they occur. On the other hand, a Ledger is a collection of individual accounts that summarise and categorize these transactions based on their nature (e.g., accounts payable, accounts receivable, inventory).

The ledger provides a consolidated view of each account’s activity, balances, and allows for easier analysis and reporting.

Different Types of Journals

In accounting, a journal entry is a record of a financial transaction made by a business or an individual. It documents the specific accounts affected by the transaction and the corresponding debit and credit amounts. Journal entries serve as the basis for maintaining accurate and organized accounting records.

Here are some common types of journals

Expense Journal Entry:

This type of entry is used to record expenses incurred by a business. It typically involves debiting an expense account and crediting a corresponding liability or cash account. For example, when a company pays for office supplies, the journal entry would debit the Office Supplies Expense account and credit the Cash or Accounts Payable account.

Revenue Journal Entry:

Revenue journal entry is used to record income earned by a business. They involve crediting a revenue account and debiting a corresponding asset or liability account. For instance, when a company sells products or services on credit, the journal entry would credit the Sales or Accounts Receivable account and debit the corresponding asset or revenue account.

Cash Journal Entry:

Cash journal entry documents transactions involving cash. These entries typically debit or credit the Cash account, depending on whether cash is received or paid out. For example, when a business receives cash from a customer, the journal entry would debit the Cash account and credit the Accounts Receivable or Sales account.

Asset Acquisition Journal Entry:

When a business acquires an asset, such as equipment or a vehicle, a journal entry is made to record the transaction. This entry usually involves debiting the relevant asset account and crediting the Cash or Accounts Payable account. For instance, if a company purchases equipment by paying cash, the journal entry would debit the Equipment account and credit the Cash account.

Liability Journal Entry:

Liability journal entry is used to record the incurrence of debts or obligations by a business. They typically involve crediting a liability account and debiting a corresponding asset or expense account. For example, when a company borrows money from a bank, the journal entry would credit the Loans Payable account and debit the Cash account.

Equity Journal Entry:

Equity journal entries are made to record changes in the owner’s equity of a business. These entries typically involve debiting or crediting equity accounts such as Owner’s Capital, Owner’s Drawings, or Retained Earnings. For instance, when an owner invests additional funds into the business, the journal entry would credit the Owner’s Capital account and debit the Cash account.

These are just a few examples of the various types of journal entries encountered in accounting. The specific accounts and amounts involved in each entry depend on the nature of the transaction and the accounting system used. Properly recording journal entries ensures accurate financial reporting and provides a clear audit trail for transactions.

FAQ on Journal Entries

What is a Journal Entry?

A journal entry is an accounting record that captures the financial transactions of a business. It consists of the date, accounts debited and credited, amounts, and a brief description of the transaction.

How to Make a Journal Entry?

To make a journal entry, follow these steps:

1. Identify the date of the transaction.
2. Determine the accounts affected and whether they are debited or credited.
3. Record the amounts and descriptions of the transaction.
4. Post the entry in the appropriate general ledger accounts.

What are the Types of Journal Entries?

The common types of journal entries include:

1. Journal entries for revenue and sales.
2. Journal entries for expenses and purchases.
3. Journal entries for cash transactions.
4. Journal entries for adjustments, such as accruals and deferrals.

What is a Debit and Credit in Journal Entries?

Debit and credit refer to the two sides of a journal entry. Debit is used to record increases in assets and expenses and decreases in liabilities and equity. Credit is used to record increases in liabilities and equity and decreases in assets and expenses.

What is a General Journal?

The general journal is the primary book of original entry in accounting. It records all transactions chronologically before they are posted to their respective ledger accounts.

How are Journal Entries Posted to Ledgers?

Journal entries are posted to their respective ledger accounts by transferring the debit and credit amounts from the general journal to the specific accounts.

What is a Compound Journal Entry?

A compound journal entry is one that involves multiple debits and/or credits in a single transaction. It is used when a complex transaction affects several accounts.

What are Reversing Journal Entries?

Reversing journal entries are used to reverse adjusting entries made in the previous accounting period. They simplify the process of recording transactions and help prevent errors.

What is the Journal Entry for Depreciation?

The journal entry for depreciation involves debiting the depreciation expense account and crediting the accumulated depreciation account.

What is the Journal Entry for Bad Debts?

The journal entry for bad debts involves debiting the bad debt expense account and crediting the accounts receivable account.

What is Accounting Journal Entries?

Accounting journal entries are the fundamental records of financial transactions in a business’s accounting system. They serve as the initial step in the accounting cycle, capturing and documenting every financial event that affects a company’s accounts. Each journal entry consists of at least two parts: a debit and a credit, which correspond to the double-entry bookkeeping system. Debits represent increases in assets or decreases in liabilities, while credits indicate increases in liabilities or decreases in assets. These entries are usually organized in chronological order in the general journal, providing a clear audit trail for financial reporting and analysis.

What Are Paid Expense Journal Entries?

Paid expense journal entries document the payment of expenses in a company’s financial records. When a business settles its outstanding liabilities, such as invoices or bills, a paid expense journal entry is created. For example, when a company pays its monthly rent, a paid expense journal entry reflects the decrease in the cash account (credit) and the reduction of the rent expense account (debit). This entry ensures accurate tracking of cash outflows and expense recognition in the accounting system.

What Are Journal Entry Accounting?

Journal entry accounting is the process of recording financial transactions in a company’s books using the double-entry bookkeeping system. It involves making equal and opposite entries for each transaction – a debit and a credit – to maintain the accounting equation (Assets = Liabilities + Equity). These entries serve as the basis for preparing financial statements and reports, enabling businesses to analyze their financial performance, make informed decisions, and meet regulatory and compliance requirements.

What Is a Journal Entry in Accounting?

A journal entry in accounting is a formal record of a financial transaction that includes at least two accounts with corresponding debits and credits. It serves as evidence of the exchange of value between different accounts within a company’s financial system. Journal entries provide a detailed breakdown of how each transaction impacts the company’s financial position, allowing for accurate reporting, analysis, and reconciliation.

What Are Contra Entry for Cash Deposit?

A contra entry for cash deposit refers to a pair of journal entries used to record the deposit of cash into a bank account. These entries help maintain accuracy and transparency in the accounting system by accounting for both sides of the transaction. The first entry is a debit to the bank account, reflecting the increase in the company’s cash (asset). The corresponding credit entry is made to an appropriate contra account, such as “Cash on Hand” or “Cash in Transit,” which helps reconcile any discrepancies between the physical cash and the bank balance.

When Do You Create a Journal Entry?

Journal entries are created whenever a financial transaction occurs within a business. This includes activities such as making a sale, purchasing inventory, paying expenses, receiving payments, and more. Each transaction that impacts the financial position of the company should be recorded through a journal entry. The timing of creating journal entries is essential to ensure accurate and timely financial reporting.

What Does Debit and Credit Mean in Journal Entry?

In a journal entry, the terms “debit” and “credit” have specific meanings based on the double-entry bookkeeping system. Debit refers to the left side of an entry and represents increases in assets or decreases in liabilities or equity. Credit, on the other hand, refers to the right side of an entry and indicates increases in liabilities or equity or decreases in assets. The dual impact of debits and credits ensures that the accounting equation remains in balance.

Different Journal Entries in Accounting

There are various types of journal entries used in accounting to record different types of transactions. Some examples include:

• Sales journal entry: Records revenue from sales transactions.
• Purchase journal entry: Records purchases of goods or services.
• Cash receipt journal entry: Records cash received from customers or other sources.
• Cash disbursement journal entry: Records cash payments for expenses or other liabilities.
• General journal entry: Captures miscellaneous transactions that don’t fit into specialized journals.

What Is a Journal Voucher Example?

A journal voucher is a document that supports a journal entry and provides additional details about a transaction. It may include information such as the date, description of the transaction, accounts involved, and supporting documents. For example, a company may create a journal voucher when correcting an error in an earlier journal entry. If a $500 purchase was mistakenly recorded as $50, a journal voucher could explain the correction, referencing the original entry and documenting the correct figures.

Journal vouchers help maintain an audit trail, enhance transparency, and provide comprehensive documentation of accounting transactions.

How ACTouch Cloud ERP Software can you help you?

To streamline your journal entry process and enhance your overall accounting efficiency, consider ACTouch Cloud ERP Software. With its user-friendly interface and advanced features, it simplifies the creation and management of journal entries. The software provides customisable templates, automated calculations, and seamless integration with other modules, ensuring accurate and timely recording of transactions.

Many ERP softwares will pass these JOURNAL ENTRIES automatically. Whether it is a Sales or Purchase or Production reporting. Based on these Journal entries, we help the companies to prepare the Trial balance, Balance sheet and Income statements.

However there are few cases, we allow customers to enter these Journals Manually especially to Account Adjustments or pass to a Suspense accounts, Depreciation etc.