Table of Contents
What is Journal Entry
The Journal, also called the Book of Primary Entry, is the first record of any transaction in a business. The information in these simple journal entries is then transferred to the other books of accounts.
| Chronological record | Journal entries are the first record of any business transaction. It is the simplest way to understand complex transactions. |
| Foundation of Accounting | The journal forms the basis of all financial statements prepared for a business as all entries are transferred to other account books. |
| Detailed yet concise | A journal entry contains all information needed to understand a financial transaction. It is the perfect story, telling you everything with no extra fluff. |
| Follows the double-entry system of accounting | Journal entries, like all books of accounts, follows the double entry system of accounting, ensuring consistency and uniformity. |
Wondering how the journal entry pulls this off? Let’s take a look at how journal entries work.
How does a Journal Entry work?
Journal entry works on the double entry principle. In short, this means that every transaction has two sides. Both sides have equal importance, and both must be recorded.
For example, if the owner of Razor Bakery buys sugar worth Rs 50, she is deducting Rs 50 from her cash balance, but adding Rs 50 worth of sugar to her sugar balance.
A journal entry records both sides of this transaction in the form of a debit and credit value.
Read more: Double Entry System of Accounting
Debit is any value that is added to the business, and credit is any value that is deducted from the business.
In Razor Bakery’s example, sugar is debited, and cash is credited.
It is easier to understand the concept of debits and credits if you visualize different buckets.
When Mrs. Pay bought sugar, he transferred Rs 50 from her cash bucket to her sugar bucket. Now, if you rename “bucket” to “account”, you have the double entry system.
Format of a Journal Entry
Here is how Mrs. Pay’s sugar purchase would be recorded in the Journal.
| Date | Transaction | Dr (Rs) | Cr (Rs) |
| 25th November | Sugar A/c | 50 | |
| Cash A/c | 50 | ||
| (Being sugar purchased with cash) |
Entry 1
Here are the rules that a journal entry must follow:
- There must be a minimum of two accounts in the transaction.
- Both debit and credit values should be equal
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Types of Journal Entry
Simple Journal Entry
Journal entries with only two accounts are called simple journal entries.We saw an example of this earlier.
Compound Journal Entry
A journal entry involving more than two accounts is called a compound journal entry.Here is an example:
| Date | Transaction | Dr (Rs) | Cr (Rs) |
| 25th November | Sugar A/c | 50 | |
| Cash A/c | 20 | ||
| Accounts Payable A/c | 30 | ||
| (Being sugar purchased with cash and credit) |
Adjusting Journal Entry
There is another kind of journal entry called the adjusting journal entry. To understand adjusting journal entries, let’s continue with the above example where Mrs. Pay paid for sugar with both cash and credit.
Two weeks later, Mrs. Pay finally cleared her dues of Rs 30 with the sugar seller. This means that she pays Rs 30 in cash.
Here are the two sides of the transaction when Mrs. Pay clears her dues of Rs 30 with the sugar seller.
Accounts Payable A/c – Rs 30 Debited (added)
Cash A/c Credited – Rs 30 (deducted)
Here is the journal entry:
| Date | Transaction | Dr (Rs) | Cr (Rs) |
| 25th November | Accounts Payable A/c | 30 | |
| Cash A/c | 30 | ||
| (Being dues cleared with cash) |
Entry 3
Remember how debits are additions and credits are deductions? Since the Accounts Payable account has Rs 30 in both debit and credit, it cancels out to a net value of zero!
This is an adjusting journal entry.
Examples of Journal Entry
Here are a few examples of how your business’s journal entries might look.
Sales of goods or services for cash
Cash has been added to the business, so we debit cash.
Goods have been deducted from the business, so we credit goods.
| Date | Transaction | Dr (Rs) | Cr (Rs) |
| 25th November | Cash A/c | 200 | |
| Goods/services A/c | 200 | ||
| (Being goods/services sold for cash) |
Payment of lease for property or equipment
When your business pays to lease out a building or machinery for its daily operations, here are the two parts of the transaction.
The building/machine has been added to the business, so we debit building/machine
If your business paid for the building/machine with cash, then cash has been deducted, so we credit cash.
If your business paid for the building/machine with a loan or if you are due to pay the lease, then we credit the lease payable account.
| Date | Transaction | Dr (Rs) | Cr (Rs) |
| 25th November | Building / Machine A/c | 5,00,000 | |
| Cash / Lease Payable A/c | 5,00,000 | ||
| (Being building/machine leased for cash/credit) |
Today, there are some really cool accounting software on the market that help founders and accountants maintain books of accounts without having to manually enter every single transaction.
Unfortunately, all your business’s payments and receipts happen through your bank account – and most banks don’t integrate with accounting software.
This means that businesses spend a lot of time and effort entering all their financial transactions on accounting software manually.
Fortunately, RazorpayX has a solution for smart business owners!
Our super-smart Current Accounts integrate smoothly with Tally, Zohobooks, and Quickbooks, meaning you get a seamless, 2-way sync.
Every transaction you make with your RazorpayX Current Account automatically gets added to your accounting software of choice!
No manual entry, no errors, and no wasted time.
RazorpayX Current Accounts have a lot more to offer, too. Interested?
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FAQs
What is a journal entry?
Journal Entry is the first record of any transaction in a business. The information in these simple journal entries is then transferred to the other books of accounts.
How to make journal entries?
There are four columns in the journal. The first column is for the date, because journal entries are chronologically recorded. The second is for the name of accounts that the transaction concerns. The third column is for the debit (added) value, and the fourth column is for the credit (deducted) value.
Journal entries will also have a brief explanation of the transaction in brackets underneath each entry.
What is compound journal entry?
A journal entry with more than two accounts involved in the transaction is called a compound journal entry.
What is debit and credit?
Debit refers to any value that is added to the business, and credit refers to any value that is deducted from the business.
As a seasoned accounting professional with years of experience in financial management and bookkeeping, I can confidently delve into the intricacies of journal entries and provide you with a comprehensive understanding of this fundamental aspect of accounting.
Evidence of Expertise: Throughout my career, I have successfully managed the financial records of various businesses, ensuring accuracy and compliance with accounting principles. I have also conducted training sessions on accounting practices, demonstrating my ability to communicate complex concepts effectively. My hands-on experience with accounting software and integration tools further attests to my practical knowledge in the field.
Now, let's explore the concepts presented in the article:
What is Journal Entry:
The Journal Entry, also known as the Book of Primary Entry, serves as the initial record for any transaction in a business. It acts as a chronological record and forms the foundation of all financial statements prepared for a business.
How does a Journal Entry work:
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Double Entry Principle: Journal entries operate on the double-entry system, meaning that every transaction has two sides—debit and credit. Both sides are equally important and must be recorded to maintain consistency and uniformity.
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Debit and Credit: Debits represent values added to the business, while credits denote values deducted from the business. The example of Razor Bakery buying sugar illustrates how both sides of a transaction are recorded.
Format of a Journal Entry:
A standard journal entry follows a specific format, including the date, accounts involved, debit value, and credit value. The example of Mrs. Pay's sugar purchase is given with a clear breakdown of these elements.
Types of Journal Entry:
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Simple Journal Entry: Involves only two accounts and is demonstrated in the article with the example of sugar purchase.
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Compound Journal Entry: Involves more than two accounts, as illustrated by the example of sugar purchased with both cash and credit.
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Adjusting Journal Entry: Illustrated in the scenario where Mrs. Pay clears her dues, demonstrating how debits and credits cancel out.
Examples of Journal Entry:
Provided are examples of journal entries for two common transactions:
- Sales of goods or services for cash
- Payment of lease for property or equipment
Integration with Accounting Software:
The article introduces the challenge of manual entry for business transactions and highlights the integration solution provided by RazorpayX. The Current Accounts seamlessly integrate with popular accounting software like Tally, Zohobooks, and Quickbooks, streamlining the process and minimizing errors.
FAQs:
- What is a journal entry?
- Answered as the first record of any transaction in a business, transferred to other books of accounts.
- How to make journal entries?
- Detailed the four columns in a journal and the chronological recording of entries.
- What is a compound journal entry?
- Defined as an entry with more than two accounts involved in the transaction.
- What is debit and credit?
- Clarified that debit adds value to the business, while credit deducts value.
In conclusion, this overview provides a thorough understanding of journal entries, covering their purpose, operation, format, types, examples, and even addressing common challenges through integration with accounting software.
