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; journal entries directly change the account balances on the general ledger.
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. 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. False journal entries figured prominently in the frauds at WorldCom, Cendant, and Xerox.
- A Risk-Based Approach to Journal Entry Testing, Richard Lanza, July 12, 2007.