In Financial accounting, journal entries are the basic records of business transactions that become the foundation for all other accounting reports.
What is Journal Entry?
A journal entry is a record of transactions that includes the date of the transaction, the account numbers, account names, and amounts to be debited and credited.
Why is Journal entry called journal entry? because the book in which journal entries are recorded, called Journal (also called the books of original entry).
The process of recording transactions in the journal is called journalizing.
All business transactions are first recorded in the journal through journal entries in chronological order i.e. in the order they take place. Each business transaction recorded is a separate journal entry.
The standard format of a journal entry is
See the explanation of each column below.
In the first column, the date of transactions is entered.
The second column includes the name of accounts into which the entry is recorded and a brief description for the entry.
By convention, First, the accounts to be debited are written, after leaving some space the accounts to be credited.
Then a brief description of the reason for the entry. It doesn’t have to be a paragraph but should be long enough that you or anyone else reviewing the journal entry can figure out why you made it
In the third column, the number of the page in the ledger is entered on which the account is written.
The fourth column contains the debit amount to be entered.
The fifth column contains the credit amount to be entered.
How to journalize transactions
Before a transaction is entered in the journal, it is necessary to analyze the transaction for its effects on the various ledger accounts.
The following is a useful method for analyzing and journalizing transactions:
- Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a drawing account is affected.
- For each account affected by the transaction, determine whether the account increases or decreases.
- Determine whether each increase or decrease should be recorded as a debit or a credit.
- Record the transaction using a journal entry
You should note that regardless of the number of accounts, the sum of the debits is always equal to the sum of the credits in a journal entry.
You can apply the golden rules of accounting to make journal entries because it simplifies the rules of debit and credit of the double-entry system.
The following table summarizes terminology that is often used in describing a transaction along with the related accounts that would be debited and credited.
Types of Journal Entry
It may be simple or compound.
Simple Journal Entry
When only two accounts are involved to record a transaction, it is called a simple journal entry.
Transaction: Goods Purchased on credit for Rs.30,000 from M/s Govind Traders on December 25, 2018.
Analysis: The transaction involves only two accounts: (a) Purchases A/c (Goods), (b) Govind Traders A/c (Creditors). As per golden rules of accounting, Purchases A/c will be debited and Govind Traders A/c will be credited.
Compound Journal Entry
When the number of accounts to be debited or credited is more than one, entry made for recording the transaction is called compound journal entry. That means compound journal entry involves multiple accounts.
Transaction: Office furniture purchased from Modern Furniture’s on July 15, 2018 for Rs. 25,000 and Rs. 5,000 is paid by cash immediately and balance of Rs. 20,000 is still payable.
Analysis: Transaction involves three accounts (i) Furniture A/c (Real Account), (ii) Cash A/c ( Real Account), (iii) Modern Furniture’s A/c (Personal Account). As per golden rules of accounting, Furniture A/c will be debited with Rs.25000 and Cash A/c will be credited with Rs.5000 and Modern Furniture’s A/c will be credited with Rs. 20000.
Other Types of Journal Entries
There are some special types of journal entries that may be simple or compound in nature.
1. Opening Journal entries
Normally, while moving from one accounting year to another, the old accounts books are closed and a fresh set of accounts books are opened for the new Accounting year.
Hence, it becomes necessary to carry forward all the assets and liabilities of the business, which exist or re last day of the previous accounting period from the past accounts books to the current accounts books.
Thus the opening balances of assets and liabilities are brought forward from the previous
accounting period by passing opening entries.
Journal Entry for the recording of opening balances –
2. Closing Journal entries
At the end of the year, the Trading Account and Profit & Loss Account are prepared to determine profits/losses of the business.
To determine such profits, all the nominal account balances must be transferred above accounts.
Such entries are called Closing entries.
For transferring Expenses / Losses to Trading Account / Profit and Loss account:
Trading Account /Profit and Loss Account Dr.
To Expenses A/c / Losses A/c
Explanation of Above Entry: All expenses / Losses Accounts will have debit balances in the respective accounts. If a debit balance account is to be closed, then it has to be credited.
Hence, the other aspect” Trading A/c /P& L A/c” has to be credited.
For transferring Incomes / Gains to Trading Account / Profit and Loss A/c –
Incomes A/c / Gains A/c Dr.
To Trading A/c / Profit & Loss A/c
Explanation of Above Entry: All Incomes/Gains Accounts have credit balances in the respective accounts. If a Credit balance account is to be closed, then it has to be debited.
Hence, the other aspect “Trading A/c /P& L A/c” has to be debited.
3. Adjusting Entries
Most businesses record journal entries that result from the passage of time at the end of the accounting period. These entries are called adjusting entries.
Because they adjust the accounting records for changes in the balance sheet and income statement accounts that continually occur and reflect changes in the firm’s resources (assets) and claims on those assets (liabilities and shareholder’s equity).
The adjusting entries are part of the measurement of net income for the period and financial position at the end of the period.