Journal entry

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A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several recordings, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced". Journal entries can record unique items or recurring items such as depreciation or bond amortization. In accounting software, journal entries are usually entered using a separate module from accounts payable, which typically has its own subledger that indirectly affects the general ledger. As a result, journal entries directly change the account balances on the general ledger.

Recording a journal entry[edit]

Some data commonly included in journal entries are: Journal entry number; batch number; type (recurring vs. nonrecurring); amount of money, name, auto-reversing; date; accounting period; and description. The accounts to be credited are indented. Typically, accounting software imposes strict limits on the number of characters in the description; a limit of about 30 characters is not uncommon. This allows all the data for a particular transaction in a journal entry to be displayed on one row.

The balance sheet is a statement showing net worth on a particular date. Journal entries are used to record injections and ejections to such net worth. After recording the transactions through journal entries, the revised balance sheet can be prepared.

Suppose the financial position of a company is as follows:

Balance Sheet
                      As on 19 July 2009     
  
  Liabilities       Amount              Assets          Amount
  Capital           50,000               Machinery        30,000
  Bank Loan         20,000               Building         25,000
                                         Stock            10,000
                                         Cash              5,000
                    ----                                  ----
                    70,000                                70,000
                    ----                                  ----

Some furniture is purchased for $ 2000 in cash so a journal entry is created:

Furniture    debit       2,000
                  Cash         credit      2,000

After the above transaction the updated balance sheet would be:

Balance Sheet
                        As on 19 July 2009          
  
  Liabilities       Amount               Assets          Amount
  Capital           50,000               Machinery       30,000
  Bank Loan         20,000               Building        25,000
                                         Furniture        2,000
                                         Stock           10,000
                                         Cash             3,000
                    ----                                  ----
                   70,000                                70,000
                    ----                                  ----

Journal entries are an easier means for perpetrating financial statement fraud than adjusting the subledgers. The former requires only a management override, while the latter requires collusion with other departments.[1] False journal entries figured prominently in the frauds at WorldCom, Cendant, and Xerox.

See also[edit]

References[edit]

  1. ^ A Risk-Based Approach to Journal Entry Testing, Richard Lanza, July 12, 2007.

External links[edit]