Small businesses must keep an accounting journal for their transactions with the financial institution. Accounting journal entries are the initial step in the process of financial reporting. It’s the base for the rest of the financial reports produced by the company. Every financial transaction requires the debit of one of the accounts in the company and additional credit in order to clearly show the transaction. This is referred to as double-entry accounting. It acts as protection that allows the company’s books to be balanced.
The first step of double-entry accounting is recording journal entries for each financial transaction your company undertakes daily.
What Is an Accounting Journal Entry?
If you complete the payment to a financial institution, it is necessary to create an entry in your general journal to document that transaction. General journals are a comprehensive account of all financial transactions that the company has. All transactions will be recorded by date. Based on the complexity and size of your company it is possible to assign a reference number be assigned to every transaction. The credit and debits should be equal and follow the basic principles in an account equation.
There’s always a general-purpose journal for businesses, however, there are also special journals that are specific to the specific business. You might have an inventory journal or a purchase journal and an accounts receivables journal, among other journals.
Who Should Use an Accounting Journal?
Smaller businesses may employ a single-entry accounting method that has only one entry per financial transaction. Each entry can be a cash receipt or cash disbursement. In either case, the company receives cash or gives money to another person. Single-entry accounting is more similar to having a checkbook instead of an accounting journal, but businesses should still keep receipts as well as the information of the financial transaction.
Many businesses employ double-entry accounting systems to ensure exactness in balancing their balance of the books. 1 Any firm that employs a double-entry accounting system must use at minimum an accounting journal for general use. Businesses might require special journals based on the nature of their business.
Other Types of Accounting Journal Entries
There are more complicated journal entries for accounting than the typical journal entry.
- The term “compound journal entry” is where more than 2 accounts are included in the journal entry. 2 For instance, it could be one account that is debited, and another credit. The amount of debt(s), as well as the credit(s), must be the same. One example of a complex journal entry could be one that deals with depreciation. Depreciation that is accrued is creditable but you could decide to detail how depreciation is deducted. This can be done by deducting every expense account for which depreciation is an element like computers and automobiles. equipment.
- An adjustment journal entry occurs at the close of an accounting time period to address any issue not resolved during the period of accounting. A good example of this is when a vendor delivers goods to your company however the invoice from that vendor was not processed before the close in the period of accounting. Adjusting entries translate real-time transactions into the accrual accounting system to ensure that your books are balanced.
- closing journal entries are created at the close of an accounting cycle to prepare for the following accounting period. These are entries that reset the accounts of the income statement of expenses and revenue to zero.
- The reversed journal entry is recorded at the start of an accounting period in order to eliminate adjustment journal entries that were made prior to the beginning of the prior time period of accounting. 2 Reversing journal entries are created due to accruals that are paid off in the accounting period that follows and the adjustments entries will no longer be required.
When to Use a Debit and Credit in a Journal Entry
One of the hardest issues to comprehend is the difference between using debits and when you should utilize credit to make the purpose of a financial transaction. This can be confusing as the majority of us consider bank accounts that have debits as if they were able to transfer funds out and credits as cash flowing into.
In double-entry bookkeeping, credit and debits are distinct. Each transaction debits one account but credits one account and credits another. 3 There are five kinds of accounts:
- Assets
- Liabilities
- Equity of shareholders
- Revenue
- Expenses
The chart of accounts should include the sub-type of account (such as cash accounts are asset account) the account number, name the account, ways you can increase the amount (debit credit or debit) as well as an explanation about the particular account. Examining a company’s Chart of Accounts combined with the credit and debit accounts makes this simpler to comprehend:
| Chart of Accounts | ||
| Increase | Decrease | |
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Shareholder’s Equity | Credit | Debit |
| Revenue | Credit | Debit |
| Expenses | Debit | Credit |
Debits and Credits
Here’s an example of how you can utilize the Chart of Accounts. Imagine you run an entrepreneur-sized business. You receive a bill for water that is $200. The bill will be paid in the near future. It is possible to debit or increase the utility account you have by 200 and also credit, or raise the account payable to you by $200. They are both equal and opposing journal entries.
A debit can increase the value of an account for expense or asset and a credit can increase the liability, revenue and equity accounts. When you purchase something, one account is devalued (value is taken out) however, another account is increased the value (value is transferred to it.) A chart of your accounts can assist you in deciding whether or not to credit or debit the account with a specific type.
Here is an illustration of the layout of the chart of accounts. Chart of Accounts:
| Asset Accounts | |||
| No. | Account Title | To Increase | Description |
| 101 | Cash | Debit | Checks Received, Cash |
| 102 | Equipment | Debit | Office Equipment |
How It All Works
Let’s put it all together and examine what happens in the day of the proprietor of XYZ, Inc. Every time a financial transaction completed, an entry needs to be recorded in your general journals. The entries should be written in chronological order. The first entry was when the owner was forming the company, here’s this journal entry. The owner bought the shares of 20,000 at $1 each stock:
| Start of Business | ||
| Account | Debit | Credit |
| Cash | $20,000 | |
| Shareholder’s Equity | $20,000 |
The next step was for the owner to buy a computer along with a printer. XYZ, Inc. This is the journal entry:
| Computer System Purchase | ||
| Account | Debit | Credit |
| Plant and Equipment | $5,000 | |
| Cash | $5,000 |
If you bought the computer system as well as a printer at a cost of $5,000 the money is taken from your bank account and then transferred to the company you purchased it from. In double-entry bookkeeping, it is when you take the sum of $5,000 out of your account for cash and transferred it into your equipment account.
Both accounts are asset accounts. Thus, you charged your cash account while debiting the account for equipment. If you later sold the same equipment for $5,000 the seller would then credit your equipment account , and deduct your cash accounts. Although this might not be right the chart of accounts explains that an equipment account shrinks by credit, while the cash account grows when debited.
The owner paid $25,000 for inventory through a credit card. This account will be deducted of $25,000 while accounts payable would be credited with $25,000. The journal entry will appear as follows:
| Inventory Purchase | ||
| Account | Debit | Credit |
| Inventory | $25,000 | |
| Accounts Payable | $25,000 |
Here are some examples of typical journal entries for a typical small-scale business.
