The core of accounting lies in recording financial transactions correctly, and the journal entry process serves as the building block of this system.Journal entry is the first step in the accounting cyclethat helps you record financial transactions as and when required.
In this comprehensive guide, we will discuss all the crucial aspects of journal entry in accounting, including its rules, format and types.
The core of accounting lies in recording financial transactions correctly, and the journal entry process serves as the building block of this system.Journal entry is the first step in the accounting cyclethat helps you record financial transactions as and when required.
In this comprehensive guide, we will discuss all the crucial aspects of journal entry in accounting, including its rules, format and types.
What Is Journal Entry In Accounting?
Journal entry is theprocess of recording business transactionsin your financial books. Journal entrieswork as a double-entry bookkeeping system, where you make a minimum of two entries for each transaction.
As any financial transaction can bring significant changes within the business, the work of a bookkeeper or an accountant is to track them using entries made in journals. Whether there is a purchase, sale or any other financial activity affecting the company, journal entries keep the details saved for future use.
Here is anexample to show how a transaction is recorded using journal entries.
Example - Mr A purchased furniture worth Rs.1,000 for his business using cash.
The journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Purchase A/C Dr. To Cash A/C (Being furniture purchased using cash) | 1,000 | 1,000 |
What is Included in Journal Entry?
Different elements are includedwhilerecording a transaction using the journal entry method. They are as follows:
- A journal entry requires a reference number that is used to index as well as retrieve the entry whenever required. This number is unique for each transaction.
- A header denoting the date of the transaction.
- The particulars, or account column, comprises account names with which the transaction occurred.
- Two columns for debit and credit amount. The debit column shows the account from which the money has been paid, and the credit column shows to which account the money has been paid.
- An explanation of the journal entry. You must give a short but proper description of the transaction entry so that it can be referred back and understood properly if required in future.
How to Make Journal Entries?
Here is theprocess for making journal entriesfor your transactions:
- The first step is determining which general ledger account the journal entry transaction will be entered. For instance, if your employer purchased furniture for the office, the nominal accounts that get affected by this are supply and cash accounts.
- Identification of accounts being debit or credit is the next step. You need to determine which account is getting debited and which account is getting credited to complete the journal entry.
- Preparation of journal entries is the third step. Record all information according to the accounts.
- Lastly, you need to close your journal accounting entries by transferring all information to the general ledger accounts.
Journal Entry Format
Theformat of the journal entryis as depicted below:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
X A/C Dr. To Y A/C (Being……………………..) | *** | *** |
Journal Entries Rules
You mustfollow a few rules while recordingyour financial transactions using thejournal entry process. They are as follows:
- Personal Account
The personal account belongs to an individual, organisation or company. Here, you need todebit the receiver, and thegiver has to be credited.
- Nominal Account
Understanding how a nominal account works while entering journal entries will help you understand your gains or losses. This account is related to incomes, gains, losses and expenses. Forall expenses and losses, you need todebit the amount, and forall gains and income, credit the amount.
- Real Account
This account mainly deals with intangible and tangible assets, including plant and machinery, furniture, bank and cash accounts. Here, thevalue that comes into the businessisentered in the debit column, and theone going out is entered in the credit column.
Journal Entry For Prepaid Expenses
Prepaid expense is theadvance paymentan organisation makesfor a certain expensethat isnot utilised during the current financial year. These expenses areconsidered as assetsin the financial books. After thebenefits of such expenses are utilised, they arerecorded as expensesin the books of accounts.
Thisexpense is recorded in the journal entriesto later understand the advance payment done by the business. In the journal entry, theprepaid expense account is debited, and thecash account gets credited, which reflects the completion of payment.
Example:
PQR Company has leased a place with monthly instalments of Rs.20,000, but the condition is to pay full rent a year (Rs.240,000) in advance.
Hence, the journal entry for this prepaid expense will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Prepaid Rent A/C Dr. To Cash A/C | 240,000 | 240,000 |
When the deduction of monthly rent starts from this account, the applicable journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Rent A/C Dr. To Prepaid Rent A/C | 20,000 | 20,000 |
Journal Entry For Accrued Expenses
Accrued expense is theexpenditure incurred in advance, butpayment for the same is not completed. This expense gets recorded during the accounting period when it is incurred, even though the payment is not complete. This isan obligation for the company, due to which it isshown as current liabilitiesin the accounting books.
Let us take an example to understand journal entries for accrued expenses better:
PQR Ltd. has paid interest on their outstanding loan of Rs.100,000 for March 2023 on 8th May 2023. Interest charged per month is 1%.
As per this scenario, interest expense is Rs.1,000 (Rs.100,000 * 1%) for the financial year ending in March 2023, but payment is made in the next accounting year, making it an accrued expense.
Hence, the journal entry would be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
31st March 2023 | Interest Expense A/C Dr. To Interest Payable A/C | 1,000 | 1,000 |
On 8th May 2023, after the payment of interest is completed, the journal entry will be as follows:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
8th May 2023 | Interest Payable A/C Dr. To Bank A/C | 1,000 | 1,000 |
Journal Entry For Depreciation
Depreciation is thereduction in the value of fixed assetsdue to wear and tear, continuous usage or application of new technology. An accumulated depreciation account helps you to maintain the depreciation provision in your journal entries.
Recording depreciation in the journal entry is done by either of the two methods as given below:
- Method 1- When an 'Asset' account is charged with depreciation.
- Method 2- When you maintain accumulated depreciation or provision for a depreciation account.
Let us look at an example:
ABC Ltd. purchased furniture worth Rs.50,000 on 20th May 2023. As per the straight-line method, the depreciation rate is 10%, and scrap value is nil.
The journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
31st March 2024 | Depreciation A/C Dr. To Furniture A/C | 5,000 | 5,000 |
Journal Entry Best Practices
A fewbest practices related to journal entriesmust be followed for better monitoring of financial transactions. Here is a list of some techniques:
- Use a workflow to review and approve journal entries before posting to general ledger accounts.
- Ensure appropriate individuals are involved in the process of approving the journal entries to avoid fraud and error in finances.
- Use a centralised location to keep all the journal entries; this will make it easier to approve and track records whenever required.
- Establish an audit trail that will be beneficial to find any discrepancies in the journal entries.
- Provide clear and transparent guidelines to individuals approving the journal entries to negate inconsistency in the result.
- Train employees on using a journal entry system to save time and complete work efficiently.
Conclusion
Recording the day-to-day transactions of a business is important to keep track of a company's financial position, and journal entries act as a big aid. Now, you have a clear idea of how journal entries work and how to record your transactions and avoid financial errors. Assessment of a business's financial position is crucial to making important business decisions, and accurate journal entries will help you take the first step in the right direction.
Frequently Asked Questions
Why are journal entries necessary?
Journal entries are important as they help to prepare other financial statements and check the financial health and position of the business. This, in turn, helps to make significant business decisions.
How to write a journal entry?
You have to write the journal entry by debiting your account from which the money will be deducted and crediting the account to which the money will get transferred. You have to clearly segregate the accounts in debit and credit columns to avoid errors in recording financial transactions.
How to do journal entries?
To do a journal entry, you need to follow the format provided below:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
X A/C Dr. To Y A/C (Being……………………..) | *** | *** |
What is a deferred revenue journal entry?
A deferred journal entry is a financial transaction that records any income received for a service or product that is not yet delivered. Deferred revenue or unearned income generally occurs when a customer prepays the amount for something to the company. In this journal entry, cash is debited from the business, and the deferred revenue account gets credited.
