For any business one of the key fundamentals is financial transactions and how they track them. A journal entry is important for all law firms transaction whether they create them manually or with the assistance of any software. Journal entries are the key building blocks that provide various reality checks for business leaders, such as whether their financial condition allows them to hire new employees, does business spends too much on operating expenses, etc. In this article, we will discuss journal entries in accounting, the components of a journal entry, its various types, and various examples in easy language so that it will be easy to understand.
What is a Journal Entry in Accounting?
In accounting term journal entry is a well detailed record of a financial transaction that generally uses a double entry system. It serves as the foundational steps which are later used to prepare the trial balance, balance sheet, profit and loss statement, etc. As we discussed that journal entry follows double entry system means it has both credit & debit columns. In a journal entry, generally assets and expenses increase with a debit, and Liabilities, Equity, and total revenue increase with a Credit.
Components of a Journal Entry
To ensure accuracy and traceability in financial records, a journal entry should follow a clear structure. A well prepare journal entry should contain some key components.
- Date: Every well prepared journal entry should start with the date. It helps to indicate when the transaction occurred. It is an important component that helps to maintain chronological order while supporting accurate period end reporting.
- Account Titles: Each financial transaction atleast affect two accounts, either debit or credit accounts. This account title helps to understand which accounts are affected. In a journal entry debits are listed first and credits are listed later to comply with a standard accounting format.
- Amounts: It is the numerical value in the respective Debit & Credit columns. To keep the accounting equation balanced the monetary amount assigned to both credit & debit should be equal. It is a critical component to make sure that the financial statement is reliable.
- Narration: At the end of a journal entry, a brief narration/description is added to list the purpose of the transaction. A brief description of the “why” help auditor, accountants, and others to determine the context behind the entry.
A simple presentation of the various components of a journal entry.
| Date | Account Titles | Debit ($) | Credit ($) |
| Jan 1 | Cash | 5,000 | |
| Service Revenue | 5,000 | ||
| (Being cash received for services rendered) |
Types of Journal Entries in Accounting
On the basis of the purpose of the financial transaction and the timing of its recording, journal entry in accounting can vary. Let’s discuss these various types in detail to have a better understanding of journal entries.
- Regular Journal Entry: As its name suggests regular journal entry documents the regular financial transactions such as sales, purchases, payments, and other receipts. It is one of the most common types of journal entries.
- Adjusting Journal Entry: It is a type of journal entry that is prepared at the end of an accounting period to record changes to accounts. It is used to update the account balance for several items such as deferrals, corrections, depreciation, etc.
- Reversing Journal Entry: It is the opposite of the adjusting journal entry. It is prepared at the start of the accounting period. It cancels the adjusting records from the previous period. This simplifies the future transaction record by preventing double counting.
- Compound Journal Entry: It records more than one account to be debited and credited. As we have discussed above that according to the general rule of the journal entry the total number of debit and credit entries should be balanced out. But that’s not always the case, like there can be one debit but more than one credit, or vice versa. This entry includes multiple lines, while the number of debit and credit may differ, but the total of debit and credit must be balanced.
- Accrual Entry: This entry is used to record the revenue or expenses that have yet to be received or paid. For example, an employee earned 5000 in December, but the payday is in January.
- Deferral Entry: This entry is used to record prepaid expenses and unearned revenues. Some examples of deferred revenue entry are prepaid rent, subscription based rent, etc.
- Correcting Entry: As its name suggests this entry is used to correct the errors by adjusting the wrong amount or wrong account. It ensures the accuracy of the financial statement.
- Recurring Entry: In this types automated template are used for repeated, periodic transactions like rent, salaries, or depreciation in accounting software. It saves time and ensures consistency in journal entries.
Examples of Journal Entries
Till now, we have discussed general entries, their types, and components. Let’s now see some of the examples of general entry to get a better perspective.
Example 1- Credit Purchase
- Transaction: Purchased $1,200 of office equipment on credit.
- Entry: * Debit: Office Equipment ($1,200) – Increases an Asset
- Credit: Accounts Payable ($1,200) -Increases a Liability
| Date | Account Titles | Debit ($) | Credit ($) |
| Jan 1 | Office Equipment | 1,200 | |
| Accounts Payable | 1,200 |
Example 2- Payroll Entry
- Transaction: Recording $10,000 in gross wages with $2,000 in tax withholdings.
- Entry: * Debit: Salaries & Wages Expense ($10,000)
- Credit: Tax Payable ($2,000)
- Credit: Cash/Salaries Payable ($8,000)
| Date | Account Titles | Debit ($) | Credit ($) |
| Jan 1acc | Salaries & WagesExpense | 10,000 | |
| Tax Payable | 2,000 | ||
| Cash / Salaries Payable | 8,000 |
How to Record a Journal Entry
While the process to record a journal entry in accounting may vary depending on the complexity of a transaction and the impacted account. We are going to discuss the usual process here.
Step 1- Determine the transaction
The first step is to identify the transaction.
Step 2- Determine the affected account.
Next you have to find out which account is affected by the transaction.
Step 3- Determine the debit and credit amounts
After identifying the affected account, you have to determine the exact amount by which the account either increases or decreases.
Step 4- Initiate the journal entry process
When you have all the detail for journal entry so you can initiate the journal entry process.
Step 5- Review and check
After the completion of the journal entry review it to make it accurate and balanced.
Common Mistakes to Avoid
During the journal entry in accounting, people make a lot of manual mistakes. Try to avoid the common mistakes listed below:
- Transposition Errors: People make a lot of mistakes related to swapping numbers during the journal entry. e.g., writing $540 instead of $450.
- Reversal of Entries: It is one of the common mistakes people make. They reverse the debit data with the credit data.
- Missing Narrations:The user should always provide a clear description of a financial report. Unclear description leaves future auditors in the dark about the context of a transaction.
- Unbalanced Amounts: Always make sure, while using the double entry that the transaction between credit and debit must be equal.
Conclusion
Journal entry in accounting is essential for businesses due to its various benefits, such as it makes audit more easy, helping in decision making, helps to maintain consistency. We hope that our article “Journal Entry in Accounting” will be beneficial for you. Please check our other articles to get valuable insights regarding accounting related issues.