What is a journal entry?

What is a journal in accounting?

In accounting, a journal is a record of a business’s financial transactions in chronological order. Each transaction is entered into the journal through journal entries.

The journal serves as the initial entry point for all transactions before they are transferred to the general ledger for further analysis and reporting. With a well-maintained journal, businesses can ensure the accuracy and transparency of their financial records.

What is a journal entry?

A journal entry is used to record financial transactions as part of a chronological record of financial activities in a double-entry accounting system. Journal entries include detailed information such as the date, description of the transaction, accounts involved, and the amount of money involved.

These entries are often used as references for creating financial statements, like income statements and balance sheets.

How to make a journal entry

To make a journal entry, simply follow these  simple steps:

1. Identify which accounts were affected by a transaction.
2. Create a journal entry recording the following details about the transaction:
   • Date
   • Description
   • Accounts affected
   • Amount.
3. Record the entry in a general ledger, if the business uses one.

Types of journal entries

While journal entries share a core structure, there are different types used to capture various financial transactions.

Simple journal entry

This is the most basic type, recording a transaction that affects only two accounts. Let’s say a business buys office supplies for $100 on credit. Here’s a breakdown of the journal entry:

• Date: 2024-05-10 (today’s date)
• Description: Purchased office supplies on credit
• Debit: Office Supplies ($100) // Increased inventory of office supplies (debit)
• Credit: Accounts Payable ($100) // Increased amount owed to the supplier (credit)

In this scenario, since cash wasn’t used yet, the cash account isn’t involved. However, the company now owes money, hence the credit to Accounts Payable.

Compound journal entry

Compound journal entries are used when a single transaction impacts more than two accounts. For instance, a business pays rent for their office space with cash. The cash account decreases (debit), but rent expense increases (debit) to reflect the cost incurred. This requires two debits and one credit, making it a compound entry.

Opening journal entry

An opening journal entry is used at the beginning of an accounting period to establish the starting balances for all accounts in the general ledger. It essentially sets the stage for recording transactions throughout the period.

Closing journal entry

At the end of an accounting period, closing entries are used to temporarily remove revenue and expense accounts from the books and transfer the net income (or loss) to the retained earnings account. This prepares the accounts for the next period with a clean slate.

Adjusting journal entry

Adjusting journal entries are crucial for ensuring the accuracy of financial statements. They account for events or accruals that haven’t been recorded through regular transactions. Examples include depreciation (wear and tear on assets), accrued expenses (expenses incurred but not yet paid), and prepaid expenses (expenses paid for but not yet used).