What are Journal Entries? Ultimate Guide for Finance

Consider this to be a refresher on Accounting 101 when you learned the answer to: “What are journal entries?” We’ll cover the basics of journal entries (that you probably already have a firm handle on).

And, when it comes to journal entries and accounting in your organisation, we will help you get to the next level by benefiting from a financial automation solution that will take the data entry, transacting, and matching off your plate. We’ll cover everything you need to know.

Coming Up

1. What are Journal Entries?

2. What are Debits and Credits?

3. How to Prepare Journal Entries?

4. How to Write a Journal Entry?

5. What are the Types of Journal Entries?

6. How Does Automation Help Journal Entries?

7. What are Journal Entry Best Practices?

8. What is the Purpose of a Journal Entry?

9. What are the Challenges of Manual Data Entry?

10. The Bottom Line

What are Journal Entries?

Journal entries are records of all business transactions that are maintained within an organisation’s accounting system. Journal entries make up the key components of the double-entry accounting method.

Journal entries exist in the general ledger, or a subledger. Their accuracy is of paramount importance because from journal entries come financial statements, which are regulated and indicative of a company’s financial status and health.

With this data, executives and stakeholders base major business decisions, so it’s necessary that the journal entries are properly maintained and up-to-date.

What are Debits and Credits?

To implement double-entry accounting, it requires that every transaction shows up in at least two accounts, hence the term “double-entry.” In order for the accounts to balance out, it requires credits and debits to be equal.

Let’s review how these work. To start, all the understanding will be based on this equation:

Assets = Liabilities + Owner’s Equity

In this equation, debits appear on the left and credits appear on the right. So, a debit on the left side (in the assets account) will increase the account. If you debit an account on the right side of this equation (either in a liability or asset account), then the balance will decrease.

A credit creates the exact opposite effect. If you credit an asset, then the balance decreases. If you credit a liability or equity account, it will increase.

So, on the income statement, revenue accounts get increased with credits, and expense accounts get increased with debits.

If it’s not confusing already, the process of preparing proper journal entries gets even more complex when more transactions take place.

To ease the burden on accountants’ shoulders, accounting automation solutions can manage journal entries and account reconciliations automatically. This ensures that journal entries are properly recorded, in turn, adding confidence to the business’ financial statements for each financial close period.

How to Prepare Journal Entries?

There are steps you can take to prepare journal entries, which include:

1. Identify accounts: Make a note of all the accounts that will be affected by the transaction
   
   
2. Determine account type: Keep in mind standard accounting rules and standards. Then decide which accounts will require journal entries. Accounting types include Expense, Revenue, Capital/Owner Equity, Assets, and Liabilities. Then, apply accounting rules to determine which accounts get credited and which get debited.
   
   
3. Prepare journal entry: Make sure that you include the correct date, account name, and number, and the debit and credit amount.
   
   

As you can see, there are many different places at which a mistake can occur. From deciding the accounts to entering an account number incorrectly, journal entries require a lot of attention to detail.

That’s why it makes sense to automate the process so that your organisation can minimise the risk of fraud and error in the highly important process of creating journal entries.

How to Write a Journal Entry?

The standard journal entry format looks as follows (with debits on the left and credits on the right):

Debit Credit

Account name and number $XXXX

Account name and number $XXXX

Both of the $XXXX represent equal values.

How to Get Data in the General Ledger?

It feels like journal entries have been recorded using paper and pen since the beginning of time. In fact, some companies still follow a similar manual method by keeping journal entries in spreadsheets.

However, this can be a recipe for disaster because it could cause manual errors to mess up accounts. Additionally, if spreadsheets are disparately stored across various people’s computers, then there is no version control and if said person calls in sick or forgets to record one entry, then the spreadsheets will suffer.

With financial automation software, transactions automatically get added into their respective accounts as invoices are created and payments are processed. In turn, accountants don’t have to spend time being bogged down and having to manually record every transaction that happens. Instead, they get to focus their time on high-level tasks to aid with strategic decision-making and analytical solutions.

What are the Types of Journal Entries?

There are a couple of different types of journal entries worth noting, which include:

Adjusting Entry

Adjusting entries take place at the end of an accounting period during financial close to ensure that all financial statements are compliant with accounting standards, such as the generally accepted accounting principles (GAAP). The entries that are affected by this are accrued expenses, unearned revenue, prepaid expenses, and accrued income.

Compound Entry

Compound entries are those that take up more than two lines of entry in a journal. For example, this happens when transactions are complex, such as payroll (which will affect deductions, tax liabilities, etc).

Reversing Entry

If there have been journal entries made in the prior period which are no longer required, then they are reversed or canceled using reversing entries. This could be the case when a wage accrual gets replaced by the payroll expenditure, for example.

Reversing entries, when done manually, can be very risky because it may be difficult to get information to account numbers, in which case entries could be input incorrectly. Many organisations realise the complexity involved and rely on automation solutions to manage all journal entries, especially reversing entries.

How Does Automation Help Journal Entries?

Manual journal entry mistakes are as simple to understand as it is to see how you can make a typo when sending a text. Simply hit the wrong key, and the message (or in this case, the number on the spreadsheet) is entirely wrong.

Journal entries can result in errors from being transposed or entered wrong in the first place. The more transactions, the more room there is for error.

With an automation software, all data is centralised and collected within a single location and directly from the source (i.e. a bank statement or even an uploaded spreadsheet) in order to prevent errors.

Additionally, you can remove the key person dependency that exists when you rely on specific people to manage journal entries in the event that they can’t show up for work at any point in time.

As journal entries are automatically updated, it makes it possible to fulfill account close procedures in a timely manner, rather than having to scramble to review journal entries and ledgers when the time comes.

What are Journal Entry Best Practices?

If we’re answering “What are journal entries?” then it only makes sense to also talk about the best practices of dealing with them.

When it comes to journal entry best practices, one of the best approaches is to begin with standardisation and complete documentation. Most journal entries do look similar, so create a template to follow.

If a journal entry won’t fit into the standard, then evaluate the need to create a generalised template for those that fall outside of common functions. Importantly, design an approval process that can be strictly followed, especially if you are still preparing journal entries manually.

To streamline the process and upkeep best practices, you can deploy an automation solution that will solve the approval process workflow for you. This way, you can ensure that the approval process is running smoothly and the same every time.

What is the Purpose of a Journal Entry?

A journal entry can be thought of as the foundation for all financial statements and reports. Since a journal is a record of all business transactions and a record of how each account is affected, it’s required to prepare financial statements and conduct financial close procedures.

Journal entries get posted into the general ledger. In turn, journal entries may be audited to analyse how a business’ financial transactions are affecting the overall financial health of the business. So, they impact business decisions, and as such, should be properly input and maintained.

What are the Challenges of Manual Data Entry?

If your business is still performing some level of manual data entry, then you’ve probably already recognised the downsides that come along with this way of performing the necessary work.

Risk and error can be overwhelming. Your financial reports and statements are only as accurate as the data that’s been input into your accounts. When an error occurs, it could take weeks or months to resolve as any supporting documentation could exist in emails or on computer files that are hard to find and access.

The labor intensive process is highly susceptible to manual errors. With the possibility to have tens of thousands, and even hundreds of thousands, line items representing transactions, the manual process is highly difficult to reign in and manage accurately.

Luckily, financial automation solutions exist and remove the risk of manual errors. Automation software can pull data from different systems and improve accuracy. From performing account reconciliations to providing governance through audit reports, these tools have the power to transform your finance team into a powerhouse.

The Bottom Line

Journal entries are like the DNA of accounting processes. Without them, financial statements and reports could not exist as they are the records of financial transactions. Instead of relying on the time-consuming and error-prone manual process of handling journal entries, your organisation can leverage the power of financial automation tools to streamline and protect the process.

This way, you can rest assured knowing that all transactions are properly recorded. So, the old question of: “What are journal entries?” can be answered and managed completely using software.