Recording Journal Entry
A journal entry is a recording of a financial transaction that has occured within the company. Journal entries are recorded in a journal either manually or in a bookkeeping system. Without proper journal entries, a company’s financial statements would be inaccurate and in violation of GAAP. Journal entries within a company’s ledger include :
- The date of the transaction.
- The account(s) and amount(s) debited.
- The account(s) and amount(s) credited.
- A memo for reference.
Bookkeeping systems will automatically edit a company’s ledger whereas manual journal entries will have to be added manually. All journal entries must have credits amounts and debits amounts equal to each other to ensure the accounting equation (Assets = Liabilities + Owner’s Equity) is correct for reporting purposes.
Double-entry bookkeeping is the most used form of accounting for businesses. Since business transactions are usually between two parties or two accounts, double-entry bookkeeping is considered the standard for bookkeeping. For example, if a company were to purchase $1,000 of inventory with cash, the inventory account would increase by 1,000 and cash would decrease by 1,000. The journal entry in the ledger would look like this:
DR. Inventory 1,000
CR. Cash 1,000
A common rule of thumb to know which accounts to debit and credit is to remember debits increase accounts and credits decrease accounts.
Single-entry bookkeeping is less widely used in business and involves a single account balance increasing or decreasing. This process of bookkeeping is more streamlined to see current balances and profit-to-loss ratios. For example, if a company were to sell $1,000 of inventory, a company using single entry bookkeeping would debit their cash account $1,000 and not record the decrease in inventory.
Journal Entries in Business
Companies use journal entries and bookkeeping to keep records on financial transactions and for financial reporting statements. Accountants tasked with journal entries must accurately input data and date the transactions appropriately for the accounting reporting period. Journals are used to produce financial statements and they are the foundation to reporting to governments and regulators accurately.