Accounting Entry

What is Accounting Entry?

An accounting entry is the formal recording of all the transaction in the books of accounts of the company where the debit and credit are recorded in the general and it is three types which include transaction entry, adjusting entry and closing entry.

In simple words, an accounting entry is a formal recording of transactions where debit and credit of transactions recorded into the general ledger. It is a written record of a commercial transaction.

Accounting Entry

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Types of Accounting Entries

There are three types of accounting journal entries which are as follow:-

Types of Accounting Entries

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#1 – Transaction Entry

Transaction entry is a basic account 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.read more entries from a customer, and other cash payments has done, which is an expense for the company. Transaction entry is 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.read more. 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. read more. The accounting journal entry is required at the end to adjust various balances in various ledger accounts, which done to meet the financial position of the business as per accounting principle like as per GAAP, i.e., generally accepted accounting principleGenerally Accepted Accounting PrincipleGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors.read more. In short, it is align reported result.

#3 – Closing Entry

Closing entry is a journal entry that is done at the end of the accounting period. This type of entry is posted to shift ending to retain earning account from all temporary accounts like loss account, gain account, expense account, 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.read more. This is done to transfer information to the next accounting period.

Entries for the transaction are done through software where one doing transaction will not know he is creating an accounting entry, e.g., creating a customer invoice. They record all commercial transactions formally.

Systems of Accounting Entry

#1 – Single Entry

The term single entry is vaguely used to define the method of maintaining accounts which 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.read more and real accounts. Hence, a single entry is not only incomplete, but the final result is also not reliable. This system typically tracks only cash receipts and cash disbursements and shows only those results needed to construct an income statement.

Advantages

  1. The single entry system is simple and less expensive.
  2. A professional person not required for 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.read more;
  3. It has a summary of daily transactions like income and expenses.

Disadvantages

  1. Lack of data may adversely affect planning and controlling of a strategic business goal.
  2. There is a lack of control on a different issue which the company faces.
  3. In case of any loss or theft, one will not be able to find it through the single accounting system.

Example

DateDescriptionIncomeExpenseInventoriesSalaries
1- Apr-12Balance b/d$50,000$20,000$10,000$15,000
4- Apr-12Raw Material Purchased$1,000
5- Apr-12Salaries Paid$12,000
20- Apr-12Bank Deposit$20,000
22- Apr-12Supplies$5,000
30 – Apr-12Balance c/d$70,000$26,000$10,000$27,000

Here, entry singly is done for every transaction.

#2 – Double Entry Bookkeeping System

It is used to make debit and credit entry, and which eventually leads to the creation of a complete set of financial statements. According to the book-entry system, every transaction has two elements. One is debt, i.e., when something is going, and another credit when coming 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. read more.

Advantages

#1 – Complete Record

Double-entry system enables businessmen 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.read more 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 financial position of the business can be ascertained with accuracy. It is done by preparing a balance sheet.

#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 statement called Trial balance.

#5 – No scope of fraud

The firm is saved from the frauds and misappropriations since full information about all assets and liabilities will be available.

#6 – Tax Authorities

The business can satisfy the tax authorities if he maintains his 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 makes 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.

Disadvantages

  1. Not suitable for the small businessman, as it is complex, it is not advised for small businesses.
  2. It is expensive.
  3. No accuracy before making of trial balance;

Example

Example 1 – Purchase of machine by cash.

DebitMachine
CreditCash

Entry on a financial statement for same will be below-

DebitCredit
Cash$5,000
Machine$5,000

Example 2 – Interest received on a bank deposit account.

DebitCash
CreditFinance Income

Entry on financial statement for same will be below:-

DebitCredit
Cash$10,000
Finance Income$10,000

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.read more shows both debit and credit that which account is debited and credited.

Accounting Entry Video

 

This article has been a guide to What is Accounting Entry and its definition? Here we discuss Accounting Entry Systems – Single Entry Bookkeeping and Double Entry Bookkeeping, its advantages and disadvantages, examples, and its types. You may also take a look at the below accounting related articles –

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Comments

  1. AvatarSurajparkash vaid says

    Nice to watch you sir by examples .
    It is easy to understand for the new ones. Thanks for the guidance.

    • AvatarDheeraj Vaidya says

      Thanks for your kind words!

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