All small businesses need a record of their financial transactions. The accounting journal entry is the first step in the financial reporting process. It is the basis for all the other financial reports prepared by the business. Each financial transaction requires a debit to one of the business's accounts and a credit to another to fully show the transaction. This is called double-entry accounting and it acts as a safeguard that allows a business's books to balance.
The first step in double-entry accounting is to record journal entries for every financial transaction that your business makes on a daily basis.
What Is an Accounting Journal Entry?
When you make a financial transaction, you make a journal entry in the general journal to record that transaction.
A general journal is a detailed account of all the financial transactions of a business. It’s also known as the book of original entry as it’s the first place where transactions are recorded. The entries in an accounting journal are used to create the general ledger which is then used to create the financial statements of a business.
The transactions are listed in chronological order. Depending on the size and complexity of your business, a reference number can be assigned to each transaction. The debits and credits must equal each other and reflect the principle of the accounting equation.
Other Types of Accounting Journal Entries
There are more complex accounting journal entries than the general journal entry.
When to Use a Debit and Credit in a Journal Entry
In double-entry bookkeeping, the debits and credits are different. Every transaction debit one account and credits another. There are five types of accounts:
Your chart of accounts will list the account sub-type (such as cash is an asset account), account number, title, how to increase it (debit or credit), and a description of the account. Looking at a firm's Chart of Accounts combined with debits and credits makes this easier to understand:
Here is an example of how to use this Chart of Accounts. Imagine that you own a small business and you get a water bill for $200. You will pay that bill soon. You would debit, or increase, your utility expense account by $200, and credit, or increase, your accounts payable account by $200. Those are equal and opposite journal entries.
A debit increases an asset or expense account, while a credit increases a revenue, liability, or equity account. Consider this—when you make a purchase, one account decreases in value (value is withdrawn), and another account increases in value (value is received.) A chart of accounts can help you decide whether to debit or credit a certain type of account.
How to Do Accounting Journal Entries?
To create an accounting journal, record the information about your financial transactions. The details of financial transactions can be derived from invoices, purchase orders, receipts, cash register tapes and other data sources.
Once you’ve analyzed the transactions, the information is documented in a chronological order in the journal. Each transaction that is listed in the journal is known as a journal entry. This information is then recorded in the ledgers.
The journal entries are usually recorded using the double entry method of bookkeeping. Each transaction is recorded in two columns, debit and credit.
For example, if you purchase a piece of equipment with cash, the two transactions are recorded in a journal entry. You will have to decrease the cash account and the increase the asset account.
Following are the three steps for completing journal entries of a business:
1. Identify the financial transactions that affect your business
2. Analyze how the transaction changed the accounting equation, whether it has increased or decreased and by how much
3. Use debits and credits to record the changes in the general journal. Ideally, the debited accounts are listed before credited accounts and every journal entry is accompanied by the transaction title, date and description.
While it’s rarely used, the single-entry bookkeeping method can also be used for journal entries. In this method, there is only a single account used for each journal entry which is a running total of cash inflows and cash outflows.
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