If you intend to work in the finance and accounting sector, understanding when to utilize an accounting journal can help you submit your taxes on time and assess the company’s financial position. What is Journal, its purpose, advantages, and other topics are covered in this article. Let’s explore!
An official document listing the company’s financial transactions chronologically by date is known as a Journal in Accounting or a book of original entries. Accountants, bookkeepers, and auditors monitor and assess an organization’s financial situation using an accounting journal.
Scroll your screen and explore What is Journal in accounting, its advantages, and its components. Also, we have covered basic journal accounting interview questions.
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Table of Content
- What is Journal in Accounting?
- What Are Debits and Credits?
- Advantages of a Journal in Accounting
- What are the Components of a Journal Entry?
- How to Enter a Transaction in a Journal for Accounting?
What is Journal in Accounting?
Journals are detailed accounts that record all of the financial transactions of a business so that they can be reconciled in the future and used as a tool for transferring information to other accounting records, such as general ledgers. The ledger organizes the information in the journal by account and summarises all the transactions that have occurred in each account.
Journal Accounting is the first step in the accounting process, where each transaction is recorded in chronological order as it occurs. A journal usually describes the date, affected accounts, and transaction amounts in a double-entry bookkeeping method.
Also read: Difference Between Journal and Ledger
Journaling with Double-Entry Bookkeeping
The most popular type of bookkeeping is double-entry accounting. Immediately, it affects the way journals are kept and journal entries are recorded immediately. Every business deal consists of a transfer of funds between two accounts.
This indicates that there are two columns for each journal entry. For instance, the bookkeeper enters two transactions in a journal entry if a business owner spends $1,000 in cash to buy inventory. Inventory, a current asset, increases by $1,000 while the cash account decreases by $1,000.
Using Single-Entry Bookkeeping in Journals
In accounting and business, single-entry bookkeeping is only sometimes employed. The setup is similar to a chequebook in that just one account is utilized for each journal entry, making it the most fundamental type of accounting. It is a short-running tally of cash coming in and going out.
For instance, if a business owner spends $1,000 cash to buy inventory, the single-entry system records a loss in cash of $1,000 and displays the total ending balance below it. A business can track total income and expenses rather than just the final balance by dividing income and expenses into two columns.
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What Are Debits and Credits?
Debits increase obligation, revenue, and equity balances while decreasing expense and asset accounts. On the other hand, credits add to the liability, revenue, and equity accounts while deducting from the asset and expenditure balances.
The fundamental accounting rule is the same: Debit the Interest Expense account and credit the Accrued Interest Payable account to reflect the accruing interest on a bank loan.
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Let’s understand basic journal entries for interviews that are frequently asked.
Here are some of the most important journal entries for interviews:
|Purchase of Goods on Credit||Purchases account||Accounts Payable account|
|Sale of Goods on Credit||Accounts Receivable account||Sales account|
|Cash Sales||Cash account||Sales account|
|Cash Purchase||Purchases account||Cash account|
|Depreciation||Depreciation Expense account||Accumulated Depreciation account|
|Bad Debts||Bad Debt Expense account||Accounts Receivable account|
|Provision for Doubtful Debts||Bad Debt Expense account||Provision for Doubtful Debts account|
|Payment of Salaries||Salaries Expense account||Cash account|
|Receipt of Interest||Cash account||Interest Income account|
|Payment of Rent||Rent Expense account||Cash account|
Advantages of a Journal in Accounting
The advantages of an accounting journal are:
1. Chronological Order of Tracks
Accounting journals record transactions as they occur. This provides thorough day-to-day details regarding the business transaction.
3. Provides Information About Each Transaction
2. Decreases Chances of Errors
The likelihood of making errors is relatively low because the journal records financial transactions’ debit and credit sides. It assists accountants and auditors in identifying budgeting issues and tracking financial anomalies for the organization.
The corresponding bill is verified only before the journal entry is created. An accountant adds a narrative to each journal entry to assist auditors in reviewing a company’s financial records.
4. Reduces Spending
A business can avoid overspending in some areas and underspending in others by keeping an accounting record. It can prevent overdrafts and assist a financial expert in identifying abnormalities.
What are the Components of a Journal Entry?
- Journal entries may contain multiple data points but generally include the following:
- A header with the date written in the journal and a description of the entry type;
- A unique reference or identification number;
- One or more accounts, the sums that will be debited, and the date or dates on which these debits will be made;
- A transaction will credit one or more accounts, a sum, and the date or dates on which the credit is made; and
- A brief explanation of the transaction
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How to Enter a Transaction in a Journal for Accounting?
Follow these steps to enter a transaction in the accounting journal:
1. Keep Copies of Every Financial Record
Before writing an entry in an accounting journal, the accountant should gather all supporting documentation for a business or financial transaction. For accurate journal entries, gather bills, purchase orders, receipts, tapes from the cash register, and invoices. Start gathering the documents at the beginning of each fiscal year, and keep them all together in one folder. This makes sure you remember to make any essential diary entries.
2. Determine the Impact on Accounts
Find the accounts in your general ledger that the journal entry will affect before posting. Sort your transactions so you can see the appropriate accounts.
It can be significantly simpler to enter journal entries if you arrange them according to transaction kinds. Purchases of new desks and computers impact a business’s cash and office supply accounts.
3. Establish the Type of Account.
Determine the account type from which money is debited and credited to create a journal entry. Examples of typical account kinds include assets, liabilities, revenue, and expenses. Because the business made purchases, the accountant reports expenses in the office supplies to account in the example above. Therefore, the cash account is an asset, whereas the office supply account is an expense.
4. Order the Transactions on the List, then Create the Journal Entry.
List each transaction chronologically, beginning with the earliest, to ensure the journal has all financial transactions. After gathering and reporting transactions, prepare your journal entry by inputting the correct date, account number, account name, and credit and debit information. Accountants include debit and credit for each transaction because Indian Accounting Standards employ the double-entry approach. The debit entries are on the left, and the credit entries are on the right. After creating all entries, an accountant checks that the debit and credit amounts are equal.
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In accounting, a journal of original entry is an official record of all business financial transactions. Now you know what is a journal in accounting, its advantages, a journal in single and double book accounting, etc.
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