How to Track Journal Entries
A significant component of accounting involves financial reporting. Financial reporting is the act of presenting a company’s financial statements to management, investors, the government, and other users to make better business decisions.
In order to determine the final monetary value of accounts that are listed on the financial statements on the company’s year end, multiple journal entries are recorded and tracked in an account called a T-account, which is a visual representation of a general ledger account.
The appropriate debits and credits are listed under the appropriate columns under these T Accounts to determine the final value to be reported. Click the link below to learn more about T-Accounts.
Why do journal entries matter to me and my career in accounting?
Although recording journal entries can be very monotonous and repetitive, recording accurate entries at the right time is imperative for companies to show their correct financial status to not only people within the firm but also to external users.
With inaccurate journal entries, companies may be perceived to be possessing more debt or less debt or as more profitable or less profitable than they actually are. As a result, this could lead companies and investors to make decisions based on false, misleading information, leading to negative ramifications.
Having the skills to record and understand journal entries is essential in any career in accounting whether you are involved in public practice and are working on a client’s audit file, or you are working in the industry and helping to prepare the company’s financial statements.
In simple terms, the first step to proper financial reporting heavily relies on recording accurate journal entries.
Journal Entries When Accounts Have Normal Balances
One easy way to remember when to debit and when to credit an account is to remember the normal balances of the five types of accounts on the chart of accounts. The normal balance is what the account would have if increases are more than decreases. Here is a list of those accounts and their normal balances. If you remember this list, it will save you a lot of time.
- Asset accounts – debit
- Liability accounts – credit
- Owner’s equity – credit
- Revenue accounts – credit
- Expense accounts – debit
As an example, if you are recording an entry to the asset account, you would debit the asset account and credit some other account.
Example of a Journal Entry
Here is an example is the journal entry you would make at the start of a new business. If an owner invested $20,000 in a new business, this would be the format of the journal entry. There would be an increase in assets, specifically, the cash account, in the amount of $20,000 recorded as a debit and an increase in the owner’s equity account would be a credit.