Click Here to get your FREE Ebook with the #1 secret to becoming a successful Million-Dollar Entrepreneur!

Overview

A business needs to understand the importance of accounting journal entries. There's a reason that accountants are so high in demand.

If your balance sheets are all over the place, you will have a tough time understanding where your resources are being utilized and how much revenue you are generating. Indeed, making accounting journal entries is one of the most vital skills for an entrepreneur.

Even if you get someone else to make these entries, it's crucial that you have a basic understanding of how it works. This will reduce the chances of fraud being committed and errors in financial statements going unmissed.

"Don't ever let your business get ahead of the financial side of your business. Accounting, accounting, accounting. Know your numbers."- Tilman j. Fertitta

How do these accounting journal entries work? in a nutshell, the key is to keep things balanced. For instance, if you make a transaction from the company, at least two accounts should be affected in the opposite direction. In the end, your goal is to make sure that your debits and credits are equal for your business to flourish.

The Importance Of Accounting Journal Entries

"Accounting does not make corporate earnings or balance sheets more volatile. Accounting jsut increases the transparency of volatility in earnings."- Diane Garnick

Naturally, you want to ensure that all your records and information are properly maintained and organized. Accounting journal entries make this easier.

The data is recorded in these journals chronologically. A specific format is followed. Therefore, there's little chance of any accounting error being missed out. Additionally, you will easily be able to find any information you need from these records.

Journal entries also aid in the recording process. They come quite in handy when financial statements are prepared. The initial recordings of the accounting journal entries make it easier to determine the income statement, balance sheet, cash flow, and a lot more.

These journal entries also prove to be invaluable in analyzing your performance. It makes the job easier for auditors who can use the financial reports to gauge how your expenditure and transactions are working out for your company.

The Approach To Accounting Journal Entries

Accounting journal entries are slightly different as they have to be recorded in chronological order and specific patterns. Four factors have to be kept in mind while making the entries including,

  • The accounts affected by the transactions
  • How the accounts are increased or decreased with the transaction
  • The overall change seen in each account
  • Ensuring that the accounting equation remains balanced

It's natural to be confused initially. However, the only way you can excel in making these journal entries is via practice. You can make use of examples available online to master the skill.

The journal entry has a few crucial elements. These include,

  • A journal entry number unique for each transaction
  • Date of the entry
  • An account column wherein the accounts impacted by the transactions are mentioned
  • Debit and credit get one column each.

The Nature of a Journal Entry

I can't stress this enough. In the end, you have to ensure that your debit and credit are balanced.

Accounting journal entries also include a brief portion for the explanation. Here, you have to write an accurate detail of the journal entry, which will help you get the relevant information when you refer back to it when needed.

Of course, the nature of your business matters too. You have to take the size and ownership of your company into account while determining the type of journal you should maintain. The general accounting journal works for small businesses.

However, big industries need something a bit more specialized. Hence, they use special journals to record transactions of specific types, depending on the nature of their business.

Typically, the type of special journals such extensive corporations maintain include

  • Sales that contain records of income earned via sales
  • Sales returns comprising details of the loss of income due to sales that were refunded
  • Accounts receivable containing records of cash owed to the company
  • Account payable which is about the amount owed by the company
  • Payroll containing details about payroll transactions like gross wages
  • Equity which maintains records of the owner's investments

How To Start Preparing Accounting Journal Entries

As an entrepreneur, you will need to prepare accounting journal entries at some point. After all, there's a limited chance that you would have enough budget to hire a reliable accountant during your initial days. Knowing how things are done will make your job easier.

First things first, you have to determine the kind of traction that has to be entered in the journal. You have two options, either to use accounting software or manage it all manually.

When you use accounting software, most of the journal entries are made by the software, and you only have to take care of the month-end adjusting entries. Let's take a look at the steps that have to be followed for accounting journal entries

Determine The Affected Accounts

The first step is to find out how the entry you are about to make in the general ledger will affect the accounts. Which accounts will be affected?

To ensure that you find the right accounts, you will have to sort out your transactions. Sort all your financial transactions like bank deposits, sales, and expenditure according to their type so that recording journal entries becomes easier.

Figure Out The Type Of Account

Standard accounting rules have to be applied to each account related to your business. For instance, if you spend some amount on your office supplies, the expenditure account will increase while the amount of cash in your bank account will decrease.

To ensure that you don't make any mistakes at this step, you have to ensure that you remember all the account types well enough. These include liabilities, revenue, expense, equity, and assets accounts, among others.

Any entry you make in the journal will be related to one of these categories. It's not really challenging to determine the type of transaction and its relevant account if you use standard accounting rules.

Get Your Journal Entry Ready

At this point, you are now aware of the accounts involved in your journal entry, along with the transaction type. So you can start preparing your journal entry now.

Make sure that you enter the correct date. Then mention the account name and number. Finally, enter the debit and credit amount.

Here's how the columns of your journal entry will look like.

DateNumberAccountDebitCredit

Don't forget to enter the date for each entry. The first entry you make will, of course, be numbered 1, and you can proceed accordingly.

That's it! You have successfully made your first journal entry!

How To Use Accounting Software For Journal Entries

With time, you will realize that maintaining accounting journal entries takes up a lot of your time. Additionally, doing it all manually increases the room for errors. This is where accounting software can come to your assistance.

The best thing about accounting software is that journal entries are automatically made each time the transactions are processed. Hence, all you have to do is make month-end adjusting entries, and your work is done!

It's up to the software to calculate and post-closing entries and ensure that your opening balances do not carry any mistakes. However, you can't trust just any software for your business. It's natural to be wary. Let's look at  some options that many have found highly beneficial.

AccountEdge Pro

This one is a desktop application that works quite well for small and growing businesses. It's mainly designed to make things easier for retailers and online sellers as it also has the option of integrating with Shopify and UPS shipping.

You can easily record a journal entry with the help of this software. Although it does not include a bank feed, you can easily download the bank statement.

Sage 50cloud Accounting

The best thing about this application is that it offers you multiple options, including on-premise installation and remote access. It can be used by a single person as well as large businesses.

You can easily get a summary view of account balances with this software and create journal entries using the General Journal Entry screen. Not only that, in case of an error, you can reverse a transaction too.

QuickBooks Online

This one's specifically designed for small businesses. Since it is updated regularly with new features, growing companies will find it quite suitable too.

It has a banking feature via which you can record all your expenses pretty easily. It also has features like automatic bank feeds reducing your workload significantly. You can delete a journal entry from the software too.

It's Time To Realize The Value Of Accounting Journal Entries!

Journal entries are a crucial component of your financial accounting process. It's up to you to decide whether you want to maintain it manually or use accounting software. However, whatever you do, ensure that your debit and credit are balanced in the end, and you stay on top of it.

It can be challenging to maintain your balance sheets with so much going around. However, if you are vigilant about your accounting journal entries, you will always remain well aware of the financial standing of your company.

Not only that, it will make it easier for you to plan your budget and use your financial resources in the best possible manner. The journal entries will also ensure that you don’t have to face any trouble finding details about any expenditure in the future.