What Is a Journal Entry in Accounting?

preparing journal entries

You can talk about what is happening in the picture, the person that took it, what isn’t pictured, or just what it means to you. A helpful method of writing is to write from different perspectives. Pick a topic or event to write about and try writing in from someone else’s perspective, like a parent’s, a friend’s, or even an animal’s. It is healthy to think about things from different points of view.

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Since their goal is just to simplify, reverse entries are optional. Then at the end of October, you compare the actual cash reserve with the cash reserve shown on the balance sheet. The steps the cost of deferred revenue are the same as in the double-entry bookkeeping. XYZ company decides to buy new computer software for $1,000. They pay $500 in cash right away and agree to pay the remaining $500 later.

A Beginner’s Guide to Recording Journal Entries

Follow your train of thought and see what kind of writing follows. Somewhere between 5-20 minutes is ideal, depending on how much you want to jot down. Setting a time will help you stay focused and stop you from getting carried away. It is easy to feel like you need to write down every detail and this will help prevent that. Penzu is a digital journal that will allow you to write from any device.

preparing journal entries

Notice that the balance of interest expense above is $800, which is the same amount of interest expense we debited if we didn’t make a reversing entry. To illustrate, let’s assume that Stacey Wilson obtained a $20,000 bank loan with a total interest expense of $2,400 on May 1, 2023. The accountant accrued the $1,600 interest on December 31, 2023. And finally, let’s close the income summary account to the capital account by debiting it to zero it out.

Step 2: Determine your account type

All examples assume tax is applied on sales and purchase. If no tax, then it can be removed as the value will be zero. Double-entry bookkeeping isn’t as complicated as it might sound. To understand the concept, think about any purchase you’ve ever made. Whichever way they’re recorded, they are a necessity for any business.

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Your general ledger is the backbone of your financial reporting. It’s used to prepare financial statements like your income statement, balance sheet, and (depending on what type of accounting you use) cash flow statement. Creating a journal entry is the process of recording and tracking any transaction that your business conducts.

You make a payment on your bank loan

Therefore instead of saying there has been an increase or a decrease in an account, we say there has been a debit movement or a credit movement. If you purchased a computer system and printer for $5,000, cash is withdrawn from your bank account and transferred to the business you bought it from. In double-entry bookkeeping, you took $5,000 from your cash account and moved it to your equipment account.

  • Now that these transactions are recorded in their journals, they must be posted to the T-accounts or ledger accounts in the next step of the accounting cycle.
  • They affect at least two accounts, and the total debits must equal the total credits.
  • Each entry is either a cash receipt or a cash disbursement.
  • Since we credited the cash account, we must debit the expense account.
  • The software will notice and won’t save the journal entry.

Manual journal entries and the verification process is often a long and tedious process which exposes businesses to the unnecessary risk of errors and fraud. Since the spreadsheets prepared manually are unable to verify key information such as account numbers, entries might be made incorrectly. When there are more than two lines of entry in a journal, it’s known as compound entry. Businesses have moved on from the age of pen and paper for a reason. Using accounting software like Deskera will help you automate the entire journal entry creation process.

What Is a Journal Entry in Accounting? A Guide

The entries above would be manually written in a journal throughout the year as business transactions occurred. These entries would then be totaled at the end of the period and transferred to the ledger. Today, accounting systems do this automatically with computer systems. Since there are so many different types of business transactions, accountants usually categorize them and record them in separate journal to help keep track of business events.

All small businesses need a record of their financial transactions. The accounting journal entry is the first step in the financial reporting process. It is the basis for all the other financial reports prepared by the business. Each financial transaction requires a debit to one of the business’s accounts and a credit to another to fully show the transaction.


You’ll notice the above diagram shows the first step as “Source Documents”. Obviously, in this tutorial, we won’t be asking you to go out and collect invoices and receipts, so we’ll conveniently “skip” that step for now. You can’t just erase all that money, though—it has to go somewhere. So, when it’s time to close, you create a new account called income summary and move the money there.

preparing journal entries

Accrual accounting provides an excellent example of how U.S. GAAP guides the reporting process in order to produce fairly presented financial statements that can be understood by all decision makers around the world. Accrual accounting is really made up of two distinct components.