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Companies maintain an accounting system to record and report their financial transactions. Journal entries are the essence of that system. These are a system of recording transactions by creating an impact on the related accounts. However, journal entries follow the double-entry system of accounting. Before discussing these entries, it is crucial to know what the double-entry system is.
What is the Double-Entry System of Accounting?
Accounting principles state every transaction impacts two or more accounts simultaneously. Companies must identify those accounts and record the effect through them. Therefore, the double-entry system requires companies to split transactions into debit and credit. The impact of the financial transaction taken on these sides must be equal.
The double-entry accounting system stems from the accounting equation. This equation states that total assets must equal the sum of equity and total liabilities. Therefore, every financial transaction that impacts one side must also affect the other equally. The double-entry system requires companies to recognize this impact through debit and credit entries. These double entries come through journal entries.
What is a Journal Entry?
A journal entry records financial transactions in the accounting system. It splits the impact of these transactions into a debit and credit side. Usually, journal entries follow a specific format. These may include the following items.
- A transaction date.
- A unique reference or identifier number.
- The affected accounts.
- A debit and credit side with equal amounts.
- A description of the transaction.
A journal entry initiates the accounting cycle by entering financial transactions into the accounting system. It helps keep a record of those transactions. As mentioned above, journal entries follow the double-entry system of accounting. Usually, these entries record financial transactions in chronological order. The data entered through these entries help constitute the base for bookkeeping and financial reporting.
What is the importance of Journal Entries in Accounting?
As stated above, journal entries are the base of the accounting system for any company. These help companies maintain a record of financial transactions within a specific period. On top of that, journal entries also allow companies to process the information in a standardized way. Journal entries help enter information into general ledgers, which lead to the preparation of financial statements.
Currently, automated accounting systems process financial transactions directly. However, they still use journal entries as a base. Journal entries are also crucial in helping companies follow the double-entry system. These entries record transactions as they occur and show the affected accounts. Similarly, journal entries are also critical in the auditing process to track the origin of financial transactions.
A general format companies may use for a journal entry is as follows.
|Particulars of financial transaction
|(General narration of transaction)
The above format includes all the essential items companies must mention in a journal entry. Using this format, companies can record every transaction. For example, a company received $1,000 from a customer. It can record the transaction using a journal entry as follows.
|Particulars of financial transaction
|Cash received from a customer
A journal entry is the basic unit of accounting. It follows the double-entry system that requires companies to split financial transactions into debits and credits. Journal entries are crucial in the accounting system and reporting financial statements. These entries also help track and maintain records for various financial transactions.
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