Definition
A journal entry is the first step in the accounting cycle, capturing all details of a business transaction in a chronological order. Each journal entry consists of at least one debit and one credit entry that must balance each other, adhering to the double-entry bookkeeping system. These entries record monetary transactions, such as sales, purchases, and expenses, and are used to update the general ledger.
Examples
-
Sale of Goods:
- Transaction: A company sells $1,000 worth of goods.
- Journal Entry:
- Debit: Accounts Receivable $1,000
- Credit: Sales Revenue $1,000
-
Purchase of Equipment:
- Transaction: A company buys equipment worth $5,000.
- Journal Entry:
- Debit: Equipment $5,000
- Credit: Cash $5,000
-
Paying Expenses:
- Transaction: A company pays $200 for utility bills.
- Journal Entry:
- Debit: Utilities Expense $200
- Credit: Cash $200
Frequently Asked Questions
Q1: What should be included in a journal entry?
A1: A journal entry should include the date of the transaction, the accounts affected, the amounts to be debited and credited, and a brief description of the transaction.
Q2: Can a single transaction affect more than two accounts?
A2: Yes, a single transaction can affect multiple accounts. In such cases, the sum of debits must equals the sum of credits to maintain the balance.
Q3: What is the purpose of a journal entry?
A3: The primary purpose of a journal entry is to capture and record all financial transactions happening within a specific period, providing a comprehensive and systematic record for preparing financial statements.
Q4: How do journal entries help in financial auditing?
A4: Journal entries provide detailed documentation of financial transactions, which is essential for auditors to verify the accuracy and completeness of a company’s financial records.
Q5: What’s the difference between a journal entry and a ledger entry?
A5: Journal entries are initial records of business transactions. These entries are then posted to the ledger accounts, which are summaries of transactions by account type.
General Ledger: A master accounting document that summarizes all the account data filtered from the journal entries.
Debit: An accounting entry that increases asset or expense accounts or decreases liability, revenue, or equity accounts.
Credit: An accounting entry that increases liability, revenue, or equity accounts or decreases asset or expense accounts.
Double-Entry Bookkeeping: A system where every transaction impacts at least two accounts, involving equal debits and credits.
Online References
Suggested Books for Further Studies
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
- “Financial Accounting: The Impact on Decision Makers” by Gary A. Porter and Curtis L. Norton
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Accounting” by Belverd E. Needles Jr. and Marian Powers
Fundamentals of Journal Entry: Accounting Basics Quiz
### What must a journal entry include?
- [ ] Only the account names
- [ ] Amounts to be debited
- [ ] A brief description of the transaction
- [x] All of the above
> **Explanation:** A complete journal entry must include the date, accounts affected, amounts to be debited and credited, and a brief description of the transaction.
### In double-entry bookkeeping, what must be equal?
- [ ] The number of debits and credits
- [x] The amounts of debits and credits
- [ ] The number of transactions per day
- [ ] The number of line items in financial statements
> **Explanation:** In double-entry bookkeeping, the total amount of debits must equal the total amount of credits in every single transaction to maintain the accounting equation.
### Which of the following is a primary purpose of a journal entry?
- [ ] To record attendance
- [ ] To summarize financial data
- [x] To document business transactions
- [ ] To calculate salaries
> **Explanation:** A primary purpose of journal entries is to document every business transaction in detail for accurate financial recordkeeping.
### What happens after journal entries are recorded?
- [ ] They are filed permanently.
- [ ] They are reviewed monthly.
- [x] They are posted to the ledger accounts.
- [ ] They are sent to the government.
> **Explanation:** After recording journal entries, they are posted to the ledger accounts where transactions are summarized by account.
### How often should journal entries be recorded?
- [ ] Weekly
- [x] As transactions occur
- [ ] Monthly
- [ ] Quarterly
> **Explanation:** Journal entries should be recorded as transactions occur to ensure up-to-date and accurate financial records.
### What type of account is credited when a company makes a sale?
- [ ] Cash
- [x] Revenue
- [ ] Inventory
- [ ] Accounts Receivable
> **Explanation:** When a company makes a sale, the revenue account is credited to reflect the earned income.
### Which account is debited when the company pays its utility bills?
- [ ] Accounts Receivable
- [x] Utilities Expense
- [ ] Revenue
- [ ] Inventory
> **Explanation:** When a company pays its utility bills, the utilities expense account is debited to recognize the expense occurred.
### Why is accuracy in journal entries important for audits?
- [ ] To impress auditors
- [ ] To increase company valuation
- [ ] For government reports
- [x] To verify the accuracy of financial records
> **Explanation:** Accurate journal entries are essential for audits as they help auditors verify the completeness and accuracy of a company’s financial records.
### How many general ledger accounts are affected by a single journal entry?
- [ ] One
- [ ] Two
- [x] At least two
- [ ] Unlimited
> **Explanation:** A single journal entry must impact at least two general ledger accounts, with one account being debited and another credited.
### What must the sum of debits and credits in a journal entry equal?
- [ ] The profit for that period
- [ ] The total company assets
- [x] Each other
- [ ] The total liabilities
> **Explanation:** In any journal entry, the sum of debits must equal the sum of credits to maintain the integrity of the double-entry bookkeeping system.
Thank you for joining our comprehensive session on journal entries in accounting. Continue your exploration into the world of debits and credits!
