Accounting plays a crucial role in any business, as it helps to manage finances, keep track of financial transactions, and ensure accuracy in financial records. One of the most important components of accounting is journal entries. These entries serve as the initial record of a financial transaction and provide a detailed description of the transaction, the accounts involved, and the amount of money exchanged.
In the following sections, we will discuss in more detail what journal entries are, their importance, how to make them, and what software can post journal entries, or daily summaries, to your books.
What is a Journal Entry?
Journal entries are the initial records of a financial transaction that a company makes. They are the first step in the accounting process and provide a detailed description of each transaction. Journal entries include a date, a description of the transaction, the accounts involved, and the amount of money exchanged. Journal entries are recorded in a company’s general journal, which is then transferred to the general ledger.
What is a General Journal? General Journal vs General Ledger
The general journal is the book where all of a company’s financial transactions are initially recorded.
A general journal is a chronological record of all financial transactions that occur within a company. It is also referred to as the book of original entry or the “journal” in accounting terms. In contrast to the general ledger, which contains all of the company’s accounts, the general journal is where all transactions are initially recorded before being transferred to the appropriate accounts in the general ledger.
The journal provides a detailed record of all transactions, including the date, description, and amount of each transaction. Each transaction is recorded in the journal as a journal entry, which consists of a debit and a credit to different accounts. The debit entry represents the account that is receiving money or an asset, while the credit entry represents the account that is losing money or an asset.
The general journal is used to record a wide range of transactions, such as sales, purchases, expenses, and other financial transactions that occur within a company. These transactions are recorded in a journal using standard accounting rules and principles, such as double-entry bookkeeping, which ensures that the debits and credits are equal in value and that the books remain balanced.
The journal serves as the primary source of information for the general ledger, which is used to prepare financial statements and other reports. Transactions recorded in the journal are posted to the appropriate accounts in the general ledger, allowing for accurate financial reporting and analysis.
Are you just starting out? Learn how to set up a general ledger, open up a business bank account, and other accounting basics.
What are Major Types of Journal Entries in Your Journal?
Each entry documents a specific event, whether it is a sale, purchase, payment, or other financial transaction. In general, there are six types of journal entries in accounting: opening, transfer, closing, adjusting, compound, and reversing.
- Opening Journal Entry. An opening journal entry is used at the beginning of an accounting period to establish the opening balances of various accounts. This entry is made to transfer the balances of all the assets, liabilities, and equity accounts from the previous period’s financial statements to the current period’s financial statements.
- Transfer Journal Entry. A transfer journal entry is used when transferring funds from one account to another within the same company. This entry is typically used to transfer funds between bank accounts or between different cash accounts.
- Closing Journal Entry. A closing journal entry is made at the end of an accounting period to close out the revenue and expense accounts and transfer their balances to the retained earnings account. This entry is also used to close out any temporary accounts that were opened during the accounting period.
- Adjusting Journal Entry. An adjusting journal entry is made at the end of an accounting period to record any transactions or events that have occurred but have not yet been recorded in the accounting books. Use this entry to record expenses, revenues, and other financial transactions that have occurred during the period but have not yet been recorded.
- Compound Journal Entry. A compound journal entry is used when multiple transactions are recorded in a single entry. Businesses use this entry to simplify the accounting process and to reduce the number of entries that need to be made.
- Reversing Journal Entry. A reversing journal entry is used to reverse the effects of a previous journal entry. This entry is typically used to correct errors in the accounting books or to cancel out the effects of a previous entry that was made in error.
What Are Most Common Journal Entries for Small Businesses?
There are several types of journal entries, which are commonly used by small businesses.
General Journal Entry
General journal entry is the most basic type of journal entry. It records all transactions that do not fall under other journal entry categories. These can include adjusting entries, such as depreciation or amortization, and closing entries, which are used to close temporary accounts at the end of an accounting period.
Sales Journal Entry
Sales journal entry are used to record the sale of goods or services. This entry includes the date of the sale, the name of the customer, the items sold, and the total amount of the sale. Sales journal entries are important as they provide a detailed record of all sales transactions, making it easy to track revenue and identify any issues.
Purchase Journal Entry
Purchase journal entries are used to record purchases of goods or services. These entries include the date of the purchase, the name of the vendor, the items purchased, and the total amount of the purchase. Purchase journal entries are crucial for keeping track of expenses and ensuring that payments are made on time.
Cash Receipts Journal Entry
Cash receipts journal entries are used to record all cash received by a company. These entries include the date of the receipt, the name of the customer, the amount received, and the reason for the payment. Cash receipts journal entries are essential as they help businesses keep track of cash flow and identify any discrepancies.
Cash Disbursements Journal Entry
Cash disbursements journal entries are used to record all cash paid out by a company. These entries include the date of the payment, the name of the vendor, the amount paid, and the reason for the payment. Cash disbursements journal entries are critical for managing expenses and ensuring that payments are made on time.
Payroll Journal Entry
Payroll journal entries are used to record all payroll-related transactions. These entries include the date of the payment, the name of the employee, the gross pay, deductions, and net pay. Payroll journal entries are important as they help businesses keep track of employee salaries and withholdings, ensuring that employees are paid correctly and on time.
Why are Journal Entries Important?
Journal entries are an essential aspect of accounting and bookkeeping. They serve as the foundation for the financial statements and provide a detailed record of all financial transactions that occur within a company. But why exactly are they important?
1. Accurate financial reporting
Journal entries provide the basis for the preparation of financial statements, such as the income statement, balance sheet, and cash flow statement. These statements help businesses evaluate their financial performance and make informed decisions.
2. Compliance with accounting standards
Journal entries must comply with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the country where the company operates. Accurate journal entries ensure that financial statements are prepared in accordance with these standards.
3. Transparency and auditability
Journal entries provide an audit trail that can be used to track all financial transactions. This helps ensure transparency and accountability in financial reporting and makes it easier to identify errors or fraudulent activities.
4. Facilitate decision-making
Accurate and timely journal entries provide management with the information they need to make informed decisions. By tracking financial transactions, businesses can identify areas of growth, cost savings, and opportunities for improvement.
5. Tax compliance
Journal entries provide the basis for tax reporting and compliance. Accurate journal entries ensure that businesses are paying the correct amount of taxes and complying with tax laws and regulations.
How to Make a Journal Entry in Your Journal
To make a journal entry, you need to follow a few steps. First, determine the date of the transaction. This is important because it helps you keep track of when the transaction occurred. Next, write a description of the transaction. This should include the names of the accounts involved and a brief explanation of what happened.
Once you have the date and description, you need to determine the accounts that are affected by the transaction. For example, if you purchase supplies for your business, you would credit your cash account and debit your supplies account. The cash account would decrease, and the supplies account would increase.
After you have determined the accounts, you need to record the amount of money involved. This is done by debiting or crediting the accounts involved in the transaction. If you received money, you would credit the account, and if you paid money, you would debit the account.
Finally, you need to record the transaction in the general journal. You need to record the date, description, accounts involved, and amount of money exchanged in the general journal. Once you have made the journal entry, you need to transfer it to the general ledger.
How to Make Closing Entries
At the end of the accounting period, you need to take your time to make the most important journal entries – closing entries. The closing entries are the final journal entries made for an accounting period and are typically used to transfer the balances of temporary accounts (such as revenue and expense accounts) to a permanent account (such as retained earnings).
To make closing entries, you need to follow these steps:
- Close revenue accounts: Debit all revenue accounts and credit the income summary account. This will transfer the balance of the revenue accounts to the income summary account.
- Close expense accounts: Credit all expense accounts and debit the income summary account. This way you will transfer the balance of the expense accounts to the income summary account.
- Close income summary account: Debit the income summary account and credit the retained earnings account. That’s done to transfer the balance of the income summary account (which is the net income or loss for the accounting period) to the retained earnings account.
- Close dividend account: Debit the retained earnings account and credit the dividend account. This will result in transferirng the amount of dividends paid to the dividend account.
By making closing entries, you can ensure that the balances of your temporary accounts are properly transferred to your permanent accounts. This makes it easier to track your company’s financial performance over time.
Using Accounting Software to Make Journal Entries
Most businesses today use accounting software to manage their finances. Accounting software makes it easy to make journal entries because it does most of the work for you. All you need to do is enter the transaction details, and the software will automatically debit or credit the appropriate accounts.
Accounting software also makes it easy to review your finances. Most software comes with financial reporting tools that allow you to see how much money you have spent and earned over a specific period. You can use these reports to identify areas where you can cut costs or invest more money.
If you’re looking for ways to streamline syncing transactions for your business with journal entries, try Synder.
Synder’s Daily Summary Feature: Daily Journal Entries to Ease Syncing Your Data
Synder is a software solution that automates accounting processes for e-commerce and SaaS businesses, bringing together financial data from various e-commerce and payment platforms into a single system. With the help of Synder Sync you can connect all your e-commerce and payment platforms in use and sync all transaction data into your accounting.
With the Daily Summary feature, users can import summarized daily totals of transactions from various sources, including Stripe, PayPal, Amazon, Shopify, BigCommerce, and Clover, into accounting general ledgers like QuickBooks Online. When this feature is enabled, Synder batches daily transactions into a single journal entry of financial data for each payment platform, posting it to accounting once a day. This journal entry is called ‘daily summary’ in Synder, hence the name of the feature. The Daily Summary functionality prevents overloading the accounting systems with excessive data while ensuring accurate categorization of transaction details for correct financial reporting, tax filing, and easy reconciliation.
Synder’s Daily Summary feature makes accounting management more efficient for business owners by providing a comprehensive overview of their incomes and expenses, while accountants can focus on the analytical part of their work powered by accurate and relevant financial data already prepared in the books.
Category mapping allows your business to map products to the right accounts, while automation settings give you more space in the way you synchronize data – you can let Synder sync it automatically, or check the journal entry created for the day in a tab, and then post it to your books. These features make the process of managing accounting systems more straightforward and less time-consuming, so you can make sure that you are not using the professional services of your accountant to check your books for errors and duplicates only.
What businesses benefit most from Daily Summary? If you are a high-transactional business, you may want to concentrate on aggregated financial data. In such cases businesses usually use QuickBooks for reconciliation and tax reporting, but not for detailed sales reporting and analytics. They do not invoice clients from QuickBooks or directly manage accounts receivable there, and do not use it for inventory management. If this sounds like what you need for your business, the Daily Summary feature may be the best approach for you.
Conclusion: Understanding Journal Entries
Journal entries are an essential part of the accounting process. They provide a detailed record of every financial transaction that a company makes, making it easier to keep track of where money is going. Journal entries are also important because they help businesses stay organized and make informed decisions about their finances.
To make a journal entry, you need to determine the date and description of the transaction, identify the accounts involved, record the amount of money exchanged, and transfer the entry to the general ledger. Using pro accounting software can make this process easier and more efficient. Even if they are not experts in the world of finance, by mastering the art of journal entries, businesses can ensure that their financial records are accurate and up-to-date.
In conclusion, making journal entries is a fundamental skill for any business owner or accountant. Whether you use accounting software or do it manually, it’s essential to keep accurate records of every financial transaction. By doing so, you can ensure the long-term success of your business and make informed decisions about your finances.