Financial accounting is a multi-step process for businesses that follow double-entry methods. The first and most important step begins with a journal entry: the recording of financial information related to business or organization transactions. This provides an audit trail to review and analyze to determine an entity’s financial condition.
Since business transactions occur on a daily basis, keeping the log up-to-date and accurate is imperative for real-time transactions. Issues in the journal or journal entries that don’t add up for any business. Fortunately, journal entries create a paper trail and record system that makes it easier to correct errors and prevent them from affecting the general ledger in the future.
What is a review?
Journal entries take place in the company journal, which is often confused with the company’s general ledger. The two are, in fact, different. The journal represents the very first record of financial information. It will later become part of the general ledger or other accounting book. The journal is the complete record of financial transactions, while other books represent summaries of account activity and balances.
The journal is usually a physical record: an actual ledger, an Excel spreadsheet, or a series of transactions tracked in accounting software. Accountants reconcile the journal to the general ledger periodically throughout an accounting period.
What is a journal entry?
Anything recorded in the company log is a log entry. Journal entries typically include sales, expenses, cash flow, inventory, and payables, among others other significant treasury transactions:
- Accounts payable: Cash owed by the company
- Accounts Receivable: Cash due to business
- Equity: Retained earnings and owner investments
- Shopping: Cash payments made to suppliers
- Receipts: Cash received by the company
- Sales Returns: Cash issued as reimbursement
- Sales: Cash recorded on sales
Entries occur in real time, at the point of origination, to ensure accurate and transparent financial reporting. Each entry indicates the transaction data, the accounts involved and the amount of the transaction. This is important because an accountant will later reconcile these transactions with the general ledger using double-entry bookkeeping.
A sample journal entry
Because journal entries occur in real time, a business may see many entries in its journal before it is reconciled to the general ledger. Nevertheless, each entry is an important element in maintaining accounting transparency. Often, accounting software manages journal entries automatically, so accountants only process them to manually reconcile or audit them. This ensures accuracy, as journal entries are often pulled directly from sales software or sales platforms.
Reviewing journal entries is simple because the entries themselves are very simple. Generally, a traditional journal entry will contain only the essentials. For example, a company log might look like this:
- March 23. Debit of $2,350. Invoice #001
- March 23. Debit of $1,500. Invoice #002
- March 24. $1,000 credit. Invoice #900
- March 24. $1,200 credit. Invoice #901
- March 25. Debit of $3,000. Invoice #003
In this example, the company can reconcile its journal at the end of the week or month. In this case, he will use double-entry bookkeeping to post each journal entry to the appropriate account in the general ledger. This reconciliation ensures the accuracy of cash flows and provides an auditing standard.
What is an adjusting journal entry?
While journaling helps businesses stay up-to-date on financial transactions, accrual accounting can cause discrepancies, especially in businesses that record hundreds or thousands of transactions each day. Unfortunately, some entries can cause turbulence when reconciling with the general ledger when a transaction begins in one period and ends in another. Accrual accounting dictates that transactions should be accounted for in the same period. To account for this, accountants will record an adjusting journal entry.
Adjusting journal entries are accounting entries entered at the end of an accounting period, to post transactions that might not settle in the current period. This allows the company to progress in double-entry bookkeeping. It also ensures that all transactions remain accounted for. The adjusting journal entry simply balances the transaction so that it can be matched appropriately. This is because businesses are moving from cash to accrual accounting and then reconciling this general ledger entry accordingly.
Adjusting journal entries is also fix. For example, if there was an error in the previous accounting period, an adjusting journal entry can correct it in the current period, to ensure financial transparency and accuracy in the future.
What is a closing entry?
A closing entry is a journal entry made at the end of an accounting period to zero temporary accounts and transfer their balances to permanent accounts. In fact, it resets the accounts so that the company starts the next period without a balance. Recording closing entries consists of debiting and crediting temporary accounts, moving journal balances to the income summary, and then to the balance sheet.
Journal entries tell a story
Journal entries are the living record of a company’s financial transactions: both inbound and outbound. They leave behind an important audit trail when it comes to evaluating the effectiveness of a company’s financial accounting practices. Moreover, they help the business to track its transactions and cash flow accordingly in the general ledger. To deepen your knowledge of investing and finance, sign up for the Investment U e-newsletter below. You’ll also find valuable stock tips and insights from some of Wall Street’s top experts daily!
Journal entries are an integral part of day-to-day business operations and are the stepping stone to quality accounting under double-entry accounting standards. Large companies probably have multiple journals and a multitude of daily transactions, each distilled into the general ledger for better insight into the financial health of the company. In this way, journal entries are truly the cogs in the financial foundation of a business.