Use of Journal Entries
Journal Entries are used to record transactions in the Journal.
Most accounting transactions pass through what is called a book of prime entry before they reach the general ledger. Books of prime entry include for example the cash book, purchases day-book, and sales day-book.
There are however entries which do not go through a book of prime entry which are recorded in the Journal using Journal Entries.
Each of the basic bookkeeping journal entries records the following details about the transaction:
- A description of the transaction being recorded.
- The account name and account code being debited and the amount
- The account name and account code being credited and the amount.
- The transaction date
- A reference number to documents supporting the transaction.
The Transaction Date for Journal Entries
The date entered in the journal entry should be the date the transaction occurred, not the date the entry is made. This will mean that the journal entry date agrees with the date on the transaction documentation.
The Account Name for Journal Entries
The account names and account code are selected from your Chart of Accounts.
In double entry bookkeeping for every debit there must be a credit, so when the basic accounting journal entries are complete the total of all the debits must equal the total of all the credits.
Why do we need Journal Entries?
Using a Journal to record each journal entry has many advantages.
- It provides an ongoing record of typical transactions. This is particular useful when producing monthly management accounts as it ensures transactions are not forgotten.
- It means that there are no unexplained transactions in the general ledger, as the journal entry provides full details and links to supporting documentation.
- It helps eliminate fraud and errors, as full explanations of all transactions are required.
What does a typical Journal Entry look like?
Journal Entries are used for many things, a typical example would be the recording of a monthly accrual for an expense such as rent. The entry would be as follows:
|Date: 30th April 2019|
|Account Name||Account Code||Debit||Credit|
|Description: To accrue for rent for the month of April.|
|Reference: Purchase Invoice 4659.|
The journal entry involves two accounts with one debit entry and one credit entry and is referred to as a simple journal entry.
Compound Journal Entry
A compound journal entry is one in which the accounting transaction involves more than two accounts and therefore more than one account is debited or credited.
Suppose a business settles an accounts payable account for 2,300 after deducting a settlement discount of 4% (92). The following journal entry would be made
In this journal entry there are three accounts involved, cash, accounts payable, and discount received, and the transaction has one debit entry and two credit entries.
Further examples of compound journals can be seen at our double entry bookkeeping journal examples page.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.