Journal Entry

What is a Journal Entry? 

Journal entries form the building block of the double-entry bookkeeping system. Under the double-entry bookkeeping system, at least two accounts are used to record any single transaction. For example, when a company buys cash supplies, the transaction will appear for supplies and the cash account. 

Components of Journal entry 

  • The transaction date 
  • The names of the impacted accounts plus the account number (if relevant) 
  • Credits and debits must always be equal 
  • A reference number that acts as a specific transaction identifier 
  • A transaction summary or description 

Format of writing a Journal entry 

The following is the general format of a journal entry: 

                Type                 Debit                  Credit 
Account number and name                  £xxxx  
Account number and name                  £xxxx 

The amount in the debit column should always be equal to the amount in the credit column. In a nutshell, for every debit, there must be identical and corresponding Credit. 

Example  

On 31 December 2020, you sold £2,000 worth of laptops to Ms Lisa on cash basis. Following will be the journal entry 

Journal Number D1246     
Date Account Reference Debit Credit 
31 December 2020 Cash D1220             £2,000  
Sales D1220                 £2,000 
Sale of laptops to Ms Lisa on 30 days credit. 

Types of Journal entry 

  1. Adjusting entry:  

Adjusting entries are usually recorded towards the end of the accounting period to bring the financial statements in line with the accounting system. Usually, these entries aim to report accrued expenditures, accrued revenue, prepaid expenses and unearned income. 

  1. Compound entry 

When there are more than two entry lines in a journal, it is known as a compound entry. It also helps to document multiple transactions at once or enter specifics of complicated transactions, such as payroll, which requires various deductions and PAYE, NIC obligations. 

  1. Reversing entry 

Reversing journal entries are recorded at the beginning of the accounting period to change or cancel entries made in the previous period that is no longer needed. Such as compensation accrual, which is offset by actual expenditure on the payroll. 

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