What is Accounting Entry?
An accounting entry is the formal recording of all the transactions in the company’s books of accounts where the debit and credit are generally recorded. There are three types: transaction entry, adjusting entry, and closing entry. These entries show the financial health of the company and provide the basis for filing their returns annually.
A basic accounting entry is a formal recording of transactions where debit and credit transactions are recorded into the general ledger. It is a written record of a commercial transaction. In a double-entry system of bookkeeping, a credit entry is offset by a debit entry in a general ledger. In the single-entry system, however, the duality principle is ignored, making it difficult to detect errors.
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Accounting Entries Explained
Accounting entries are the documentation of a company’s accounts. They record all business-related transactions, both direct and indirect, and help the management to analyze the data.
The accounting process can be carried out through both the single-entry system of bookkeeping or the double-entry system of bookkeeping. While the former is easy to maintain, and cost efficient, it does not record the duality of transactions and cannot be reliable to find errors. However, the latter balances every credit entry with a debit entry in a ledger and makes finding errors or inconsistencies easier.
While the double-entry system allows the business to have a foolproof system of documenting transactions, it is more time-consuming in comparison to its counterpart and costlier too.
Companies are required to follow a double-entry system as it is GAAP approved and it is the norm for filing purposes as well. On a micro level, businesses also have provisional accounts for future usage. A double-entry system allows the company to create those provision accounting entries.
While it may seem like a lot of unnecessary work, it acts as the very basis for all facets of the business. From payments, tax filing, pricing, profitability, scalability, debt obligations, capital raising, and so on.
There are three types of accountingTypes Of AccountingThere are different types of the accounting which an organization can follow as per the scope of its work and need of stakeholders. Some of them include financial accounting, forensic accounting, accounting information system, managerial accounting, taxation, auditing, cost accounting, etc. journal entries which are as follow:-
#1 – Transaction Entry
Transaction entry is a basic accounting entry for any event in business. For example, bill receipt from a customer, the bill presented from a supplier for payment, cash receiptCash ReceiptA cash receipt is a small document that works as evidence that the amount of cash received during a transaction involves transferring cash or cash equivalent. The original copy of this receipt is given to the customer, while the seller keeps the other copy for accounting purposes. entries from a customer, and other cash payments have been done, which is an expense for the company. Transaction entry is on a cash basis and accrual basis.
#2 – Adjusting Entry
Adjusting Entry is a journal entry done at the end of an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.. It is based on accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. . The accounting journal entry is required at the end to adjust various balances in various ledger accounts, which are done to meet the business’s financial position as per accounting principles like GAAP, i.e., generally accepted accounting principleGenerally Accepted Accounting PrincipleGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.. In short, it is an aligned reported result.
#3 – Closing Entry
A closing entry is a journal entry done at the end of the accounting period. This entry type is posted to shift ending to retain the earning account from all temporary accounts like loss, gain, expense, and revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common examples.. This is done to transfer information to the next accounting period.
Entries for the transaction are done through software where one doing the transaction will not know he is creating an accounting entry, e.g., creating a customer invoice. They record all commercial transactions formally.
Like we discussed in brief earlier in this article, there are two systems through which basic accounting entries can be documented. Let us understand both of them in detail through the explanation below.
#1 – Single Entry
The term single entry is vaguely used to define the method of maintaining accounts that do not conform to strict principles of double entry. It is wrong to describe it as a system. The term ‘single entry’ does not mean that there is only one entry for each transaction. The absence of the two-fold effect of each transaction makes it impossible to prepare a trial balance; and to check the arithmetical accuracy of the books of accounts, engendering a spirit of laxity and inviting fraud and misappropriations.
Profit and loss accounts and balance sheets cannot be prepared due to the absence of nominal accountsNominal AccountsNominal Accounts are the general ledger accounts which are closed by the end of an accounting period. Their balance at the end of period comes to zero so they don't appear in the balance sheet. real accounts. Hence, a single entry is not only incomplete, but the final result is also not reliable. This system typically tracks cash receipts and cash disbursements and shows only those results needed to construct an income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements..
Let us understand the advantages of disadvantages of this system through the points below.
- The single-entry system is simple and less expensive.
- A professional person has not required the maintenance of single entry system accountingSingle Entry System AccountingThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company.;
- It has a summary of daily transactions like income and expenses.
The disadvantages of the concept are as follows:
- Lack of data may adversely affect the planning and controlling of a strategic business goal.
- There is a lack of control over the different issues which the company faces.
- In case of any loss or theft, one will not be able to find it through a single accounting system.
|Raw Material Purchased
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Here, entry singly is done for every transaction.
#2 – Double Entry Bookkeeping System
According to the book-entry system, every transaction has two elements. One is debt, i.e. when something is going, and another credit is coming in. In simple language, what comes in credit, and what goes out is debt. It is the main component of the double entry systemDouble Entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. which eventually creates a complete set of financial statements.
Let us understand the advantages of the more elaborate form of accounting through the points below.
#1 – Complete Record
A double-entry system enables people in business to keep a complete, systematic, and accurate record of all transactions. Details of any transactions or events they can verify at any time.
#2 – Ascertainment of Profit or loss
The systematic record maintained under a double-entry system enables a business to ascertain the results of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. for any given period. The owners can know the profitability of business operations periodically.
#3 – Knowledge of Financial Positions
With the help of Real and Personal accounts, the business’s financial position can be ascertained with accuracy. It is done by preparing a balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company..
#4 – A check on the Accuracy of Accounts
Under the double-entry system, every debit has a corresponding credit. The arithmetical accuracy of books can be tested by preparing a trial balance statement.
#5 – No scope of fraud
The firm is saved from fraud and misappropriations since full information about all assets and liabilities will be available.
#6 – Tax Authorities
The business can satisfy the tax authorities if it maintains its accounts book properly under the double-entry system.
#7 – Amount due from Customers
The accounts book will reveal the amount due to customers. Reminders can be sent to customers who do not settle their accounts promptly.
#8 – Amount due to Suppliers
The trader can ascertain from the books of accounts the sums he owes to his creditors and make a proper arrangement to pay them promptly.
#9 – Comparative Study
Results of one year may be compared with those of previous years, and a reason for the change may be ascertained.
Despite the various advantages, there are a few factors that prove to be a hassle for businesses. Let us discuss them through the points below.
- It is not suitable for small businesses, as it is complex and not advised for small businesses.
- It is expensive.
- No accuracy before making of trial balanceMaking Of Trial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.;
Example 1 – Purchase of machine by cash.
Entry on a financial statement for same will be below-
Example 2 – Interest received on a bank deposit account.
Entry on financial statementOn Financial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. for same will be below:-
The double entryDouble EntryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit. shows that the account is debited and credited, both debit and credit.
This article has been a guide to What is Accounting Entry. Here we explain Single Entry and Double Entry Bookkeeping, advantages & disadvantages, examples & types. You may also take a look at the below accounting related articles –