Accountancy Basics: Mastering Journal Entries
by Yuvi K - December 16, 2023
Accountancy Basics: Mastering Journal Entries
Accounting is a key part of everyday business operations, and journal entries are the backbone of it. Knowing how to record these transactions accurately and reasonably is fundamental to any successful finance office.
This article will explore what journal entries are, why they’re important, and how to create them correctly. By the end, you’ll have mastered the basics of accountancy and be ready to take on more investments and business activities.
What Are Journal Entries?
Journal Entries, as the word suggests, are simply any type of transaction that is recorded in a journal. This includes purchases, sales, investments, payments, and so on.
These entries are used to establish the financial position of a business at a given time and should provide evidence of its activities. Going one step further, these entries also help to track the progress of an entity’s financial performance over time.
Journal entries are usually written on a double-entry bookkeeping system or as part of a larger, more comprehensive accounting system.
Why Are Journal Entries Important?
Journal entries are important because they provide an accurate record of the financial transactions of a business. This helps to ensure that the business’ financial accounts are kept in order and up to date.
Journal entries also enable a business to accurately track its financial performance and to assess how well it is doing in comparison to other entities in the same sector or geographic area.
The accuracy and reliability of journal entries also gives potential investors an insight into how a business is performing.
How to Create Journal Entries?
Creating journal entries can seem complicated at first, but it’s actually relatively straightforward. The steps involved in creating a journal entry are as follows:
- Step 1: Record the date of the transaction in the date column.
- Step 2: Write the details of the transaction in the narration column. This should include the names of any parties involved in the transaction and an accurate description of what has been bought or sold.
- Step 3: Calculate the appropriate debit and credit amounts for the transaction. Each transaction requires two entries; one for the debit side and one for the credit side.
- Step 4: Enter the debit and credit amounts in their respective columns in the journal.
- Step 5: Sum up the total of the debit and credit columns in the journal.
Double-Entry System
Journal entries follow a double-entry system, with transactions recorded on two sides; the debit side and the credit side. As the name suggests, the debit side of the transaction is where the cost of the purchase or charge is recorded, while the credit side is where the income from the transaction is recorded.
The double-entry system ensures that the transactions are balanced and that any errors made are quickly spotted and rectified.
Types of Journal Entries
The various types of journal entries include:
- Cash and Bank Payment Entries: These are journals entries that record payments made with either cash or check. They usually involve debiting the cash account in the ledger and crediting the bank account.
- Purchase and Sales Entries: These are journals entries that record the purchase or sale of goods and services. They involve debiting the inventory or expense account and crediting the bank account or customer/supplier account.
- General Ledger Entries: These are journal entries that record transactions that don’t involve payments or transactions that involve multiple accounts, such as the purchase of inventory or the issuance of a loan.
- Adjusting Entries: These are entries that are used to make changes to the financial accounts of a business. Examples include depreciation entries and accruals.
Conclusion
Journal entries are an essential part of the accounting process. They allow a business to accurately record and track its financial transactions and provide valuable insights into its financial performance.
By understanding and correctly using journal entries, a business is able to ensure that its accounts are up to date and that they provide a true reflection of its activity.
