Learning Outcome 3:
Prepare Journal Entry

Information Sheet 1.3-1:
Preparing journals

Learning Objectives:

After reading this INFORMATION SHEET, LEARNER MUST be able to:

1. Prepare journal entry.
2. Identify the steps in preparing journal.

Overview

Journals are prepared by recording financial transactions in chronological order using the double-entry method of bookkeeping

Journal entries are prepared by recording financial transactions in a company’s books. They are a key part of the double-entry accounting method, which has been used for centuries to keep financial records.

What is a journal entry?

A journal entry is a summary of a company’s financial transactions, which it publishes in its official accounting record book. Creating a journal entry is typically the first step in the accounting cycle, which is a process that allows organizations to document and report their financial transactions. Journal entries typically include the date of a transaction, the amounts for the company to credit or debit and the accounts that the transactions affected. They might also include a description of the transaction and a reference number.

Companies use journal entries to record changes to their accounts in their general journals, which list their transactions in chronological order. Larger business often businesses often use a double-entry accounting system to ensure accuracy when detailing their transactions, while smaller companies often use a single-entry accounting system. Double-entry systems record every transaction a company makes for both debit and credit accounts, while a single-entry system only records one entry. 

How to create a journal entry 

Journal entries allow companies to develop a variety of financial reports, and understanding how to create them can make it easier to develop important financial documents like income statements, balance sheets and cash flow statements. As you’re in the process of creating your journal entry, review your information carefully throughout each step. Here are four steps you can take to create a journal entry:

1. Determine the accounts that the transaction affects 

The first step to creating a journal entry involves determining which general ledger accounts the transaction is likely to affect. For example, if your employer purchased new printer ink and pens, the transaction likely affects your office supply and cash accounts. Larger organizations often have a variety of business accounts that they use, so it can be useful to review those accounts before you create your entries. 

To help you record your journal entries more easily, consider categorizing your financial transactions by type. This can make it easier for you to identify the purpose of the transaction. Consider assessing your transactions based on whether they involved cash and creating a category for cash and one for non-cash. You might also categorize your transactions based on their objectives, with a category for internal purchases and one for external purchases. 

2. Identify the account to credit or debit

To create a journal entry, it’s necessary that you understand which account to debit and which to credit. Determine which account type to use for your situation after completing a transaction. Assets, revenues, expenses and liabilities are examples of account types you might credit or debit. For example, a company that purchases new supplies creates an expense in its office supplies account. This also reduces the company’s assets since it purchased the supplies with cash to make the purchase. The company would debit its office supplies account and credit its cash account. 

3. Prepare your journal entry

Once you understand which accounts to credit and debit, you can prepare your journal entry by entering the date of the transaction. You can then record the debits and credits into the appropriate accounts. After recording that information, add the date of the accounting period that affects the transaction if this information isn’t already available. Most journal entries also include a transaction number, which helps companies track their transactions more easily. 

Larger companies that complete multiple transactions often record more than one entry regularly. Ensure that you list any debits on the left side of the journal entry and any credits on the right side. In addition, review your debits and credits to make sure that they’re equal. If these numbers differ, review the information from the transaction again to determine your mistake. Consider including a brief description that explains the purpose of the transaction. Depending on the company, it might also be necessary to write your name on the entry and obtain authorization from a manager.

4. Close your accounting entries

In accounting, closing entries is a term that refers to the procedure of transferring the journal entries to a general ledger, assessing the total number of credits and debits to ensure that they’re equal and adjusting those entries. Adjusted journal entries help you incorporate depreciation and other accounting concepts that you don’t include in a journal entry into your financial statements. Once you have a final trial balance, which verifies that your accounts are equal at the end of the accounting cycle, you can begin creating new journal entries for the next accounting period.

Example of a journal entry

Here’s an example of a journal entry for you to review:

Example 1

Example 2

Debt and credit journal entry tips

When you create a journal entry, it’s often beneficial to review any resources or documents available to you to ensure you include the correct information. Here are a few additional tips to consider when debiting or crediting an account: 

• Provide a clear description. Explaining the purpose of your journal entry by including a description can help other accounting professionals better understand the changes you made to an account. 
• Simplify your journal entry. Consider simplifying your journal entry by creating two separate columns for credits and debits and minimizing the use of lines to separate your entries. 
• Use a journal entry template. Consider using a journal entry template for any recurring transactions you have to ensure you create accurate entries.
• Know your account types. To ensure you write a journal entry correctly, spend some time memorizing the different account types and consider creating a few practice entries.

Also read:
https://www.highradius.com/resources/Blog/what-is-journal-entry-guide/#:~:text=Identify%20which%20accounts%20are%20to,the%20entries%20to%20the%20journal.

Reference:
https://www.indeed.com/career-advice/career-development/example-of-journal-entry