Journal entries are the first step in the accounting cycle and are used to record all business transactions and events in the accounting system. In this step, all the accounting transactions are recorded in general journal in a chronological order.
‘General journal’ is also known as “Journal book” or “Book of Original entry”.
Recording and understanding journal entries are essential for any accountant or firm trying to prepare a company’s financial statements.
HOW TO MAKE JOURNAL ENTRIES ?
Accounting journal entries always follow the double-entry accounting method, with each journal entry always having a debit entry and a credit entry.
Steps in the process of preparing a journal entry :-
- Analyze the accounts involved in a business transaction
- Apply the rules of debit and credit based on the type of each account.
- After identifying the accounts involved in the transaction and deciding upon the applicable rules, the journal entry is recorded in the general journal in a specified format.
EXAMPLE OF JOURNAL ENTRY :-
ABC Ltd, purchased an equipment for Rs 35,000 in cash. Pass the journal entry for this transaction.
Here, the accounts effected are cash and equipment. Cash is decreasing because the company has paid cash to purchase the equipment(asset)
Hence, the journal entry will be :-
Equipment A/c (Dr) Rs 35,000
To Cash A/c (Cr) Rs 35,000
(Being equipment purchased for cash )
FORMAT OF JOURNAL ENTRIES
Journal entry formats are composed of the following elements:
1. A header that includes the date of the journal entry
2. A serial number or a journal entry number that is used to index the journal, also known as ‘Folio’
3. The account name and/or number.
- Description of the journal entry and nature of the transaction which is called ‘Particulars’.
IMPORTANCE OF JOURNAL ENTRIES
Journal entries are the foundation for all other financial reports. They provide important information that are used by auditors to analyze how financial transactions impact a business.
It is very important to record accurate journal entries so as to show the true financial position of the firm to both internal as well as external users.
Basically, the first step to proper financial reporting heavily relies on recording accurate journal entries.
Thus, in simple words Journal entries are summaries of transactions that enable further accounting processes to take place.