An accounting journal 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.
What is Accounting Journal Entry?
An accounting journal entry is a formal recording of transaction where debit and credit of transaction recorded into the general ledger. This is a written record of a commercial transaction.
Types of Accounting Journal Entries
There are three types of accounting journal entries which are as follow:-
#1 – Transaction Entry
Transaction entry is basic account entry for any event in business. For example bill receipt from a customer, the bill presented from a supplier for payment, cash receipt entries from a customer and other cash payment has done which is an expense for the company. Transaction entry is cash basis and accrual basis.
#2 – Adjusting Entry
Adjusting Entry is a journal entry done at the end of an accounting period. It is based on accrual basis accounting. 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 principle. In short, it is basically align reported result.
#3 – Closing Entry
Closing entry is a journal entry which 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 account. This is done to transfer information to the next accounting period.
Accounting entries for the transaction are done through accounting software where one doing transaction will not know he is creating an accounting entry e.g. creating customer invoice. Accounting entries record all commercial transactions formally.
Systems of Accounting Journal Entry
There are two system through which accounting journal entry is done:-
#1 – Single Entry Accounting Journal System
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 define 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 sheet cannot be prepared due to the absence of nominal accounts 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 of Single Entry Accounting Journal System
- The single entry system is simple and less expensive.
- A professional person not required for maintenance of single entry system in accounting.
- It has a summary of daily transactions like income and expense.
Disadvantages of Single Entry Accounting Journal System
- Lack of data may adversely affect planning and controlling of a business strategic goal.
- There is a lack of control on a different issue which the company faces.
- In case of any loss or theft, one will not able to find it through the single accounting system
Example of a Single Entry System
Here, entry singly is done for each and every transaction.
#2 – Double Entry Bookkeeping System
This 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 come in credit and what goes out is debt. This is the main component of the double entry system.
Advantages of Double Entry Accounting Journal System
#1 – Complete Record
Double entry system enables businessmen to keep a complete, systematic and accurate record of all transaction. Details of any transactions or events can be verified at any time.
#2 – Ascertainment of Profit or loss
The systematic record maintained under double entry system enables a business to ascertain the results of business operations 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. This is done by preparing a balance sheet.
#4 – A check on the Accuracy of Accounts
Under the double entry system, every debt 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 by customers, reminders can be sent to the 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 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 of Double Entry System
- Not suitable for the small businessman, as it is complex it is not advised for small business.
- It is expensive.
- No accuracy before making of trial balance.
Example of Double Entry Accounting Journal System
Example 1 – Purchase of machine by cash.
Entry on financial statement for same will be below-
Example 2 – Interest received on a bank deposit account.
Entry on financial statement for same will be below:-
The double entry shows both debit and credit that which account is debited and which credited.
Accounting Journal Entry Video
This has been a guide to What is Accounting Entry? Here we discuss Accounting Journal Entry Systems – Single Entry Bookkeeping and Double Entry Bookkeeping, its advantages and disadvantages, examples and also the types of Accounting Entries. You may also take a look at the below accounting related articles –