What is a Journal Entry in Accounting?

Monetary transactions are foundational to any enterprise—and so is monitoring them. And, whether or not you create them manually or use software program to help, a journal entry is important for all a legislation agency’s transactions.

Within the realm of accounting and bookkeeping, journal entries accumulate key particulars of enterprise transactions. These accounting entries mean you can preserve correct monetary information and stories, monitor money circulate, adjust to regulatory necessities, and extra.

However what’s a journal entry in accounting, and the way are they created?

Within the following publish, we’ll cowl the basics of understanding journal entry accounting—from the right way to file a journal entry to an summary of widespread varieties of journal accounting entries. We’ll additionally define how utilizing accounting software program can simplify journal entries for your enterprise.

In a double-entry bookkeeping system, the place each monetary transaction will need to have a debit with a corresponding credit score in at the least two totally different accounts, a journal entry information the main points of debits, credit, and accounts affected.

As soon as recorded, journal entries are used to replace a legislation agency’s basic ledger. 

Normally, every journal entry ought to embrace the next details about a transaction:

Transaction date
The names of the accounts impacted by the transaction (plus account numbers, if relevant)
Quantity debited (DR)
Quantity credited (CR)
A short description of the transaction

Journal entries might also embrace different particulars (reminiscent of a reference quantity), relying on your enterprise and record-keeping wants.

Why are journal entries vital for a enterprise? 

Journal entries are basically step one within the accounting course of, which is important for offering correct monetary information. 

Making certain correct monetary information is essential for a wide range of causes, together with:

Dependable monetary reporting
Empowering knowledgeable enterprise choices
Compliance with regulatory necessities
Permitting for correctly submitting taxes
Auditing

Put merely, if transactions usually are not recorded precisely in journal entries (whether or not you or your bookkeeper do that manually, otherwise you use accounting software program to maintain it), then you definitely danger having incomplete or inaccurate monetary and enterprise information.

The way to file a journal entry 

Whereas the specifics will differ relying on elements like the sort and complexity of a transaction and the accounts impacted by it, there’s a basic course of for recording a journal entry in accounting. 

When manually making a journal entry, you (or your accountant or bookkeeper) will observe these widespread steps:

Step 1: Determine the transaction

First, you must decide which transaction you’ll be recording.

Step 2: Determine the accounts

Subsequent, decide which accounts are affected by the transaction.

Step 3: Decide debits and credit

For every account affected by the transaction, establish the precise quantities for which the account was elevated or decreased. (We’ll define extra in regards to the distinction between debits and credit in journal entry accounting later on this publish).

Step 4: Report the journal entry

After you have all the main points, you’ll be able to file the transaction as a journal entry. As described beforehand, this consists of the transaction date, account names, quantity debited, quantity credited, a quick description of the transaction, and another pertinent particulars.

Let’s have a look at this customary journal entry instance to show how this might look. If Firm ABC bought $1,000 in workplace chairs on March 1, that transaction could possibly be recorded as a journal entry like this:

Date
Account/Description
Ref #
Debit (DR)
Credit score (CR)

March 1, 2024

1234

Workplace furnishings

1,000

Money

1,000

To file fee for workplace chairs in money

Word: Many trendy accounting software program choices will automate the journal entry course of. In the event you use accounting software program at your enterprise, the journal entry might look a bit totally different, however the particulars and ideas are the identical.

Step 5: Overview and verify

It’s vital to assessment the journal entry to make sure that it’s:

Correct (i.e., are the accounts and quantities appropriate?)
Balanced (i.e., are the debits and credit equal, in order that the accounting equation “Belongings = Liabilities + Shareholders’ Fairness” is balanced?)

Word: In the event you use accounting software program that routinely creates journal entries for sure transactions, you might not see every journal entry or you’ll have to run a report back to view journal entry particulars for a particular transaction. Make sure to know the way your accounting software program tracks and makes these particulars obtainable.

Debits and credit in journal entries

To grasp journal entries, it’s vital to know the excellence between debits and credit in accounting (that are totally different from how we might consider debits and credit in on a regular basis life or banking). 

Put merely, in journal entries for double-entry bookkeeping, we differentiate between debits and credit primarily based on how they influence various kinds of accounts.

Debits, that are recorded on the left aspect of an account:

Improve asset and expense accounts
Lower legal responsibility, fairness, and income accounts

Credit, that are recorded on the best aspect of an account:

Lower asset and expense accounts
Improve legal responsibility, fairness, and income accounts

In accounting phrases, we group account sorts as belongings, liabilities, and shareholders’ fairness (comprised of income, bills, and capital/fairness), referring to the next:

Belongings: Issues of tangible worth, together with money, funds in financial institution accounts, accounts receivable, tech {hardware} (reminiscent of laptop {hardware}), furnishings, and many others. 
Liabilities: Issues which are owing, together with financial institution loans, bank cards, and accounts payable.
Income: Funds acquired in change for items or companies as a part of enterprise.
Bills: Issues associated to the price of doing enterprise, like hire, payroll, provides, and many others.
Capital/fairness: Represents the proprietor’s monetary curiosity within the enterprise, together with investments made by house owners and retained earnings.
Basic ledger: the central accounting file that tracks all monetary transactions of a enterprise, categorizing them into totally different accounts for reporting and evaluation functions.

Frequent errors to keep away from when recording journal entries

Whereas it’s a good suggestion to have an accounting skilled or accounting software program help to assist guarantee accuracy and well timed entries, there are additionally some widespread errors to be careful for when recording journal entries. 

Keep away from errors like:

Inputting incorrect quantities. Double-check that debit and credit score quantities are correct (particularly if inputting information manually).
Unbalanced quantities. When utilizing double-entry accounting, every transaction should steadiness with equal debits and credit.
Recording beneath the unsuitable accounts. Make certain that transactions get recorded within the appropriate accounts. For a legislation agency, for instance, if court docket submitting charges are incurred, they need to be categorised beneath accounts for shopper or litigation prices—not workplace provides.
Formatting inconsistencies. Use the identical format for issues like dates and account naming conventions. Additionally, debits ought to at all times be recorded on the left and credit ought to at all times be recorded on the best. Not solely does this assist your bookkeeper, nevertheless it permits you to preserve extra correct information. 
Lack of order. Journal entries ought to be recorded in chronological order.

Sorts of journal entries 

There are various various kinds of journal entries in accounting, and every has a particular function associated to recording totally different transaction sorts. 

Opening journal entries

Made initially of an accounting interval, opening journal entries set up the opening steadiness for related accounts. A lot of these journal entries sometimes carry over the ending steadiness from the earlier accounting interval or system (which can contain adjusting for adjustments).

For instance, in the event you run a legislation agency, the opening journal entries for a brand new fiscal 12 months would set up the opening balances for all accounts (such because the balances of the agency’s money account, gear, accounts payable, and proprietor’s fairness).

Closing journal entries

Closing journal entries serves as a solution to mark the tip of an accounting interval (reminiscent of the tip of a fiscal 12 months). This kind of journal entry is made to shut non permanent accounts (as an illustration, income and expense accounts) and switch their balances to everlasting accounts on the steadiness sheet (reminiscent of retained earnings).

Recording closing journal entries thus permits a enterprise to reset its basic ledger to begin the following interval with a brand new journal.

Commonplace journal entries

Commonplace journal entries pertain to plain or routine enterprise transactions. This kind of journal entry information issues like gross sales, purchases, and bills.

For instance, an ordinary journal entry for the fee of $1,200 in bar affiliation charges in money would present a debit of $1,200 and a credit score of $1,200 in money.

Switch journal entries

Because the identify suggests, switch journal entries file transactions that transfer an expense or earnings between accounts inside the similar group.

For instance, if a legislation agency transfers $15,000 from a belief account to an working account, this is able to be recorded in a switch journal entry displaying:

Working account: $15,000 debit 
Belief account: $15,000 credit score

Adjusting journal entries

Adjusting journal entries updates account balances and ensures that monetary information are correct by recording any adjustments to accounts that aren’t in any other case accounted for throughout a particular interval. This kind of journal entry takes place on the finish of an accounting interval.

Adjusting journal entries could also be made, for instance, in the event you discover that your monetary information don’t match your income and bills. On this case, you might file transactions like:

Unearned income
Accrued bills (i.e. an expense reported in an accounting interval, however earlier than it’s paid) and accrued income (i.e. work that has been carried out in an accounting interval, however for which the shopper has not but been invoiced)
Expense deferrals (reminiscent of when a fee is made in an account interval earlier than the interval by which the expense is incurred)
Estimates

You might also have to make adjusting journal entries to appropriate for errors like a missed or incorrect entry beforehand made.

Compound journal entries

Compound journal entries file when a couple of account is affected by a single transaction (that’s, when there may be a couple of account debited or a couple of account credited in a transaction). A lot of these journal entries embrace a number of strains, and—whereas the variety of credit and debits should not have to be equal—the full of debits and credit should be equal.

For instance, if a enterprise have been paying off a $5,000 mortgage (legal responsibility) from a number of sources ($4,000 money, an asset, and $1,000 in stock, an asset), then:

There could be one line for debit ($5,000 notes payable) for the mortgage quantity paid
There could be two strains for credit: one for $4,000 money (an asset getting used to pay the mortgage) and one for $1,000 in stock (an asset getting used to pay the mortgage) 

On this instance, whereas there are a number of strains, the full of debits ($5,000) and credit ($4,000+$1,000 = $5,000) are equal and balanced.

Reversing journal entries

Made at first of an accounting interval, reversing journal entries cancel an adjusting entry that was recorded within the earlier interval to assist simplify the accounting course of. Reversing journal entries are sometimes made to account for accrued income and bills. 

For instance, if a enterprise made a journal entry for an accrued expense (like accrued wages for work carried out, however not but paid) within the earlier accounting interval, they may then use a reverse journal entry to permit them to account for the wages payable within the present accounting interval.

Finest practices for utilizing various kinds of journal entries 

In terms of utilizing various kinds of journal entries, take into account the next greatest practices:

Keep inside your information base. Preserving correct monetary information is essential. Whereas it’s vital to familiarize your self and perceive how various kinds of journal entries work, in the event you don’t have accounting expertise, you might wish to delegate journal entries to accounting professionals or accounting software program. 
Think about the aim. As a result of there are lots of varieties of journal entries which you could make, it’s vital to fastidiously take into account the aim of every sort of entry with a purpose to use them precisely. 
Be well timed. Make sure to file journal accounting entries promptly and precisely. This helps keep away from errors and missed entries, whereas additionally conserving information up-to-date. The extra time that passes between the transaction and recording the journal entry, the much less probably you’re to notice it with accuracy. 
Use know-how to assist. Fashionable accounting software program can go a great distance in the direction of serving to to simplify and streamline the recording of monetary transactions. In some instances, it may possibly automate this course of virtually solely. In the event you’re a legislation agency, you’ll simply wish to be certain your resolution is legal-specific.
Guarantee audit trails. Whether or not you create journal entries manually or use software program, it’s vital to keep up audit trails to doc the main points of your legislation agency’s journal entries.
Overview repeatedly. Simply because a course of works at one time doesn’t imply it’s the most effective match eternally. Overview your journal entry processes periodically to establish potential areas of enchancment.

Learn extra about accounting and bookkeeping greatest practices for legislation companies in our article right here.

Monitoring and managing journal entries 

Correct monitoring of journal entries is essential for correct monetary reporting for any enterprise. 

In terms of precisely the way you monitor and handle journal entries, there are a number of totally different instructions you’ll be able to take. Finally, the most effective methodology to your agency will come all the way down to elements like the scale and complexity of your legislation agency’s accounting wants, your funds, and the diploma of scalability your legislation agency might require.

Some widespread strategies and instruments for monitoring journal entries for small companies embrace:

Ledgers or journals. To file journal entries manually, you’ll be able to go for a ledger or journal (for hand-written journal entries), or you’ll be able to sort out and print entries to create bodily journals. 
Spreadsheets. You may also use applications like Excel to trace and handle journal entries.
Accounting software program. A lot of at the moment’s accounting software program choices supply automated journal entry creation, with added options like audit trails, reporting, and integrations. Whereas that is actually essentially the most correct and environment friendly possibility, it’s vital for legislation companies to pick software program that understands the wants of authorized professionals to keep up compliance and relevance. 

Ideas for environment friendly journal entry administration

Whichever methodology you utilize to file and monitor journal entries for your enterprise, accuracy, and effectivity ought to be your major targets.

With this in thoughts, take into account the following tips for efficient journal entry administration:

Create a transparent, standardized process. Whatever the methodology you select, make it possible for the method for creating and reviewing journal entries is evident and constant.
Go chronological. Make sure that journal entries are logged chronologically. 
Conduct common critiques and reconciliations. By reviewing your books repeatedly, you’ll be able to assist higher guarantee their accuracy. 
Make the most of templates. A technique to assist guarantee consistency is to make use of standardized journal entry templates the place attainable. Accounting software program might help with this.
Doc, doc, doc. Create and preserve clear and detailed information documenting journal entry actions (reminiscent of who created every entry and when, and who made any modifications).

Utilizing accounting software program for journal entries 

Full and correct journal entry accounting is essential for correct monetary recordkeeping and reporting for all companies, together with legislation companies. Handbook journal entry accounting, nonetheless, might be tedious and isn’t sometimes an space of experience for many legal professionals. 

With this in thoughts, most trendy legislation companies have moved past guide accounting entries—turning as a substitute to accounting software program to help. 

Utilizing accounting software program for journal entry accounting streamlines and automates lots of the guide duties associated to journal entry administration. For instance, most accounting software program can routinely create journal entries while you obtain invoices or funds. And, while you do have to create journal entries manually (for issues like month-end changes or depreciation bills, as an illustration), accounting software program can simplify the method for you.

Through the use of trendy accounting software program to trace journal entries, legislation companies can:

Save time and cut back duplicate and guide information entry
Cut back human entry errors for extra correct journal entries
Simplify the assessment of journal entries
Streamline different workflows by integrating their accounting software program with different methods (Clio, for instance, integrates with a wide range of accounting instruments)

Contemplating adopting software program to assist simplify journal accounting entries? There are a selection of choices to select from, reminiscent of:

QuickBooks On-line

QuickBooks On-line is a well-liked accounting software program resolution for small companies. The software program routinely information most enterprise transactions (reminiscent of bill funds, bills, and stock purchases) to your basic ledger accounts, with out you having to create a guide journal entry for every transaction. 

QuickBooks On-line integrates with Clio, which implies your legislation agency can save much more time through the use of the software program collectively. The mixing permits you to routinely sync Clio your contacts, payments, funds, belief, and working transactions to your QuickBooks On-line ledgers.

Xero

Xero, which additionally integrates with Clio for streamlined workflows, creates journal entries immediately into your basic ledger for transactions like funds on invoices and payments, expense claims, and extra. To simply view the entries made in your basic ledger, you’ll be able to run a Journal Report in Xero.

Finally, selecting accounting software program to your legislation agency is a vital resolution for any legislation agency. The perfect possibility for you is determined by your agency’s particular wants. Our information to the most effective authorized accounting software program for legal professionals might help. 

You may also take into account the next options when selecting accounting software program for journal entries:

Reporting. Does the software program present audit path and reporting options? It’s essential that you simply’re in a position to monitor journal entries, generate monetary statements, and meet any relevant regulatory necessities for authorized accounting.
Customization. If wanted, can the software program tailor journal entry templates (for instance, with customized fields) to make sure journal entry information are as correct and helpful as attainable to your agency.
Integrations. As beforehand talked about, accounting software program that may combine with different generally used instruments, like authorized apply administration software program for legislation companies, can additional streamline workflows and enhance effectivity. 
Help. Does the software program supply buyer assist choices in case you have questions or need assistance?
Safety. As with every know-how you take into account to your legislation agency, it’s vital to make sure that accounting software program instruments preserve sturdy safety protocols to make sure information stays safe and compliant.

Last ideas on journal entries in accounting

Sustaining correct monetary information is essential to any legislation agency. Journal entries are a key first step within the accounting course of. As such, it’s vital for authorized professionals to know the basics of how accounting entries work.

With that mentioned, that doesn’t imply that it’s important to—or ought to, essentially—be writing out your legislation agency’s journal entries by hand. Accounting software program might help you (or your accounting workforce) to extra simply, effectively, and precisely file, monitor, and handle journal entries. 

Word: The knowledge on this article applies solely to U.S. practices. This publish is offered for informational functions solely. It doesn’t represent authorized, enterprise, or tax recommendation.

We revealed this weblog publish in March 2024. Final up to date: March 7, 2024.

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