An Introduction to Journal Entries | Bookkeeping Basics
Updated: Oct 20, 2022
What is a Journal Entry?
Journal entries provide initial details about financial transactions in your business. If you keep your books manually, then journal entries first get recorded in journal(s). For those that use accounting software, like QuickBooks, journal entries are summarized and recorded directly into your general ledger.
If you use the double-entry bookkeeping system, where every transaction consists of a debit and corresponding credit, journal entries are where you will record the accounts affected.
Types of Journals
Not to be confused with the general ledger, the general journal is where you record your journal entries. However, many businesses who keep their books manually opt to also use special journals. In that case, the general journal is used for unique transactions that don’t fit into any of your special journals. Once recorded, the amounts are then posted to the appropriate accounts in the general ledger.
If you have repetitive transactions, you can create a journal for each account, known as a special journal. This avoids overwhelming your general ledger and makes it easier to navigate your journals. The most common special journals are sales, purchases, cash receipts, and cash disbursement. At the end of each period, you total your transactions and post it in your general ledger.
How to Write a Simple Journal Entry
You’ll first want to determine which accounts will be affected. Identifying the correct account may be difficult at first, but once you start entering transactions regularly, you’ll learn which transactions go where. Once you know which account to record the transaction under, you can write your journal entry with all the necessary information:
The name and number of the accounts affected
A reference number
Debit and credit amount
Journal entries are recorded in chronological order, and debits will always be recorded on the left while credits are recorded on the right. There are multiple ways to format journal entries, but a common example is shown below:
Types of Journal Entries
The journal entry above illustrates how to write a very simple journal entry. However, there are many scenarios where you might need to record a special entry for a transaction.
At the beginning of a financial period, you may need to reverse or cancel an entry made in the previous period. Reversing entries are commonly used for accrued revenue and expenses. For example, in the preceding period, you may have made an entry for payroll accrual, which will be later replaced in the current period by actual payroll expenditure.
Sometimes multiple accounts may be affected by a single transaction. When you have more than one debit and one credit for an entry, you will need to make a compound entry that includes multiple lines. Just remember that for every transaction, debits must always equal credits!
Adjusting journal entries are made to ensure that your revenue and expenses match up with your records. At the end of each financial period, you should review your books. You may need to record extra transactions accrued during the period such as prepared expenses, unearned revenue, accrued expenses, and accrued revenue. You may also find an error that you need to correct such as a missed entry, an entry that needs to be moved to another period, or an incorrect entry.
At the end of the financial year, you need to “close the books.” This refers to the process of resetting your accounts by moving information from temporary accounts on the income statement, such as revenue and expenses, to permanent accounts on the balance sheet. The temporary accounts will be reset to zero on your general ledger so you can start the year fresh.
Journal entries are the foundation of your journals. They provide details about each transaction which is later summarized in the general ledger. If you do your bookkeeping manually, it’s extremely important that you record journal entries accurately. It can be easy to accidentally debit or credit the wrong account or input the wrong amount, so check to make sure your work is correct. Reconciling your accounts at the end of the period also helps you catch any errors.
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