Journal Entry, Rules for Journal Entry

Each general journal entry lists the date, the account titles to be debited and the corresponding amounts followed by the account titles to be credited and the corresponding amounts. The accounts to be credited are indented.

A journal entry is used to record a business transaction in the accounting records of a business. A journal entry is usually recorded in the general ledger; alternatively, it may be recorded in a subsidiary ledger that is then summarized and rolled forward into the general ledger. The general ledger is then used to create financial statements for the business.

The logic behind a journal entry is to record every business transaction in at least two places (known as double entry accounting). For example, when you generate a sale for cash, this increases both the revenue account and the cash account. Or, if you buy goods on account, this increases both the accounts payable account and the inventory account.

The structure of a journal entry is:

• A header line may include a journal entry number and entry date.
• The first column includes the account number and account name into which the entry is recorded. This field is indented if it is for the account being credited.
• The second column contains the debit amount to be entered.
• The third column contains the credit amount to be entered.
• A footer line may also include a brief description of the reason for the entry.

Thus, the basic journal entry format is:

Types of Journal Entries

There are several types of journal entries, including the following:

• Adjusting entry. An adjusting entry is used at month-end to alter the financial statements to bring them into compliance with the relevant accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards. For example, you could accrue unpaid wages at month-end if the company is on the accrual basis of accounting.
• Compound entry. A compound journal entry is one that includes more than two lines of entries. It is frequently used to record complex transactions, or several transactions at once. For example, the journal entry to record payroll usually contains many lines, since it involves the recordation of numerous tax liabilities and payroll deductions.
• Reversing entry. This is typically an adjusting entry that is reversed as of the beginning of the following period, usually because an expense was to be accrued in the preceding period, and is no longer needed. Thus, a wage accrual in the preceding period is reversed in the next period, to be replaced by an actual payroll expenditure.

Rules of Journal Entry

When a business transaction takes place and we have to make a journal entry, we must follow these rules:

• In a double-entry bookkeeping system, a journal entry must affect at least 2 accounts. Also, one of the accounts must be debited and the other one must be credited.
• The debit amounts and the credit amounts must be equal.

Most popular classification is the Personal, Real & Nominal account and the rules of these are as follows:

1. Personal Account

A personal account is that of a person, company, an organization such as a bank, and so on.

• Debit the Receiver, Credit the giver
• Accounts that fall in this category are: Debtors, Creditors and so on

2. Real Account

Real Account is the account of tangible and intangible items such as inventory, cash, bank account, plant and machinery and so on

• Debit what comes in, Credit what goes out
• Accounts that fall in this category are: Cash, bank balance, stock of goods, Purchase, Sales, Plant & Machinery and so on

3. Nominal Account

This account is the account of profits, losses, incomes, and gains.

• Debit all losses and expenses, Credit all incomes and gains.
• Accounts that fall in this category are Profit, Interest, Dividend, Depreciation.