In a world of cloud technology and automated accounting tools, creating a manual journal entry may feel like churning butter or washing your clothes in a creek. Everything was once entered into paper journals, which contained all the accounting details until they were transferred to the general ledger (also made from real paper).
So, what are journal entries used for and what do you need to know? Here are five frequently asked JE questions:
Are journal entries still necessary with modern accounting software?
Technology is making it easier and easier to handle day-to-day bookkeeping and accounting. Bank feeds and recurring transactions reduce manual entry. Everything inside your accounting software is connected, so when you send an invoice, receive a bill, etc… entries are made for you behind the scenes.
But there are still times we need to make manual entries. In many cases, these involve adjustments at the end of the period or corrections. Accrued or prepaid expenses, payroll, and depreciation are good examples.
If you have an asset that needs to be depreciated each month, you’ll need to create a journal entry to adjust the asset’s book value and the balance of the depreciation account. Since no money actually changes hands, there wouldn’t be a banking transaction to trigger an automated entry.
What are the required parts of a journal entry?
When you create a journal entry, make sure you include four key pieces. Every entry needs to include:
- Date (since many are end-of-period adjustments, the relevant date is often not the same as the date you create the entry)
- Debit amount and account(s)
- Credit amount and account(s)
- Description (you need to briefly describe what the entry is accomplishing for later reference)
As with most transactions, your accounting software should give each journal entry a unique number. This makes it much easier to look back and see exactly what was done and when. If your entry is related to a source document like an invoice or statement, it’s a good idea to include the number or date range from that document in the JE description as well, so you can verify information later on.
Can a journal entry involve more than two accounts?
Just like anything in a double-entry accounting system, journal entries need to include at least two accounts. Every transaction will impact two or more accounts and this should result in both debit and credit entries in equal amounts.
However, a compound journal entry could include far more than two accounts. As long as the debits and credits balance, you could have multiple accounts either side. Payroll is a common example of this. You may debit Salaries Expense and balance it with multiple credits for Salary Payable, Insurance Payable, and various income withholdings payable.
Compound journal entries help keep your books clean and make it easier to review later on. Just imagine the above payroll transaction being split into five or six entries with each withholding balanced against a fraction of the salary expense. Talk about a big mess, too much manual effort, and a challenge to track everything down to check your work!
Can you reverse a journal entry?
If a mistake is made in a journal entry, you can reverse it, often by creating a new entry that debits and credits the same amounts to the opposite accounts. But, it’s not just mistakes that can be fixed with a reversal. You can use reversing entries in the course of your monthly bookkeeping too.
One example of this would be creating journal entries for accrued revenue or expense and then reversing them as the revenue is earned or the expenses are incurred. You need to be sure to complete the reversal, or you’ll be left with inaccurate books. This is one reason it’s so crucial to review your balance sheet account as part of the month-end closing process.
Are there risks with journal entries?
Some people have an irrational fear of manual journal entries. But if you do it right, you don’t have to worry.
As we just mentioned, there’s a risk of creating an adjusting entry and forgetting to reverse it later on. There’s also the chance of making an error any time we manually enter amounts and accounts. Remember the human error that was reduced by automated accounting software? Yep, we run that risk again when we make manual entries.
The truth is there’s always a chance of oversights and errors. That’s why it’s so crucial to make sure everything balances and to review and reconcile important accounts as often as possible. Whether you’re making manual journal entries or relying on automation, you always need a quality control process to keep everything in check.