Updated on: Jun 9th, 2024
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8 min read
The core of accounting lies in recording financial transactions correctly, and the journal entry process serves as the building block of this system. Journal entry is the first step in the accounting cycle that helps you record financial transactions as and when required.
In this comprehensive guide, we will discuss all the crucial aspects of journal entry in accounting, including its rules, format and types.
The core of accounting lies in recording financial transactions correctly, and the journal entry process serves as the building block of this system. Journal entry is the first step in the accounting cycle that helps you record financial transactions as and when required.
In this comprehensive guide, we will discuss all the crucial aspects of journal entry in accounting, including its rules, format and types.
Journal entry is the process of recording business transactions in your financial books. Journal entries work as a double-entry bookkeeping system, where you make a minimum of two entries for each transaction.
As any financial transaction can bring significant changes within the business, the work of a bookkeeper or an accountant is to track them using entries made in journals. Whether there is a purchase, sale or any other financial activity affecting the company, journal entries keep the details saved for future use.
Here is an example to show how a transaction is recorded using journal entries.
Example - Mr A purchased furniture worth Rs.1,000 for his business using cash.
The journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Purchase A/C Dr. To Cash A/C (Being furniture purchased using cash) | 1,000 | 1,000 |
Different elements are included while recording a transaction using the journal entry method. They are as follows:
Here is the process for making journal entries for your transactions:
The format of the journal entry is as depicted below:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
X A/C Dr. To Y A/C (Being……………………..) | *** | *** |
You must follow a few rules while recording your financial transactions using the journal entry process. They are as follows:
The personal account belongs to an individual, organisation or company. Here, you need to debit the receiver, and the giver has to be credited.
Understanding how a nominal account works while entering journal entries will help you understand your gains or losses. This account is related to incomes, gains, losses and expenses. For all expenses and losses, you need to debit the amount, and for all gains and income, credit the amount.
This account mainly deals with intangible and tangible assets, including plant and machinery, furniture, bank and cash accounts. Here, the value that comes into the business is entered in the debit column, and the one going out is entered in the credit column.
Prepaid expense is the advance payment an organisation makes for a certain expense that is not utilised during the current financial year. These expenses are considered as assets in the financial books. After the benefits of such expenses are utilised, they are recorded as expenses in the books of accounts.
This expense is recorded in the journal entries to later understand the advance payment done by the business. In the journal entry, the prepaid expense account is debited, and the cash account gets credited, which reflects the completion of payment.
Example:
PQR Company has leased a place with monthly instalments of Rs.20,000, but the condition is to pay full rent a year (Rs.240,000) in advance.
Hence, the journal entry for this prepaid expense will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Prepaid Rent A/C Dr. To Cash A/C | 240,000 | 240,000 |
When the deduction of monthly rent starts from this account, the applicable journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
Rent A/C Dr. To Prepaid Rent A/C | 20,000 | 20,000 |
Accrued expense is the expenditure incurred in advance, but payment for the same is not completed. This expense gets recorded during the accounting period when it is incurred, even though the payment is not complete. This is an obligation for the company, due to which it is shown as current liabilities in the accounting books.
Let us take an example to understand journal entries for accrued expenses better:
PQR Ltd. has paid interest on their outstanding loan of Rs.100,000 for March 2023 on 8th May 2023. Interest charged per month is 1%.
As per this scenario, interest expense is Rs.1,000 (Rs.100,000 * 1%) for the financial year ending in March 2023, but payment is made in the next accounting year, making it an accrued expense.
Hence, the journal entry would be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
31st March 2023 | Interest Expense A/C Dr. To Interest Payable A/C | 1,000 | 1,000 |
On 8th May 2023, after the payment of interest is completed, the journal entry will be as follows:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
8th May 2023 | Interest Payable A/C Dr. To Bank A/C | 1,000 | 1,000 |
Depreciation is the reduction in the value of fixed assets due to wear and tear, continuous usage or application of new technology. An accumulated depreciation account helps you to maintain the depreciation provision in your journal entries.
Recording depreciation in the journal entry is done by either of the two methods as given below:
Let us look at an example:
ABC Ltd. purchased furniture worth Rs.50,000 on 20th May 2023. As per the straight-line method, the depreciation rate is 10%, and scrap value is nil.
The journal entry will be:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
31st March 2024 | Depreciation A/C Dr. To Furniture A/C | 5,000 | 5,000 |
A few best practices related to journal entries must be followed for better monitoring of financial transactions. Here is a list of some techniques:
Recording the day-to-day transactions of a business is important to keep track of a company's financial position, and journal entries act as a big aid. Now, you have a clear idea of how journal entries work and how to record your transactions and avoid financial errors. Assessment of a business's financial position is crucial to making important business decisions, and accurate journal entries will help you take the first step in the right direction.
Journal entries are important as they help to prepare other financial statements and check the financial health and position of the business. This, in turn, helps to make significant business decisions.
You have to write the journal entry by debiting your account from which the money will be deducted and crediting the account to which the money will get transferred. You have to clearly segregate the accounts in debit and credit columns to avoid errors in recording financial transactions.
To do a journal entry, you need to follow the format provided below:
Date | Particulars | L/F | Debit Amount (Rs) | Credit Amount (Rs) |
X A/C Dr. To Y A/C (Being……………………..) | *** | *** |
A deferred journal entry is a financial transaction that records any income received for a service or product that is not yet delivered. Deferred revenue or unearned income generally occurs when a customer prepays the amount for something to the company. In this journal entry, cash is debited from the business, and the deferred revenue account gets credited.
Journal entry is fundamental in recording financial transactions. It entails rules, format, types, and best practices. Different types of journal entries such as prepaid expenses, accrued expenses, depreciation are explained through examples. Understanding the significance of journal entries for financial monitoring is crucial for business decisions.