What are the Accounting entries? (Definition, Example, and Explanation)

Overview:

Accounting entries, which are also more commonly known as simply journal entries, are one of the most important parts of an accountant carrier. The accounting or journal entries play a crucial role in the bookkeeping of every business, a small business or a huge business.

Account entries are done by using the double entry bookkeeping method. Every financial statement is recorded both as credit and debit. The double bookkeeping entry method helps balance the book by entering a financial statement both as credit and debit.

Explanation

Take, for example. A company called the A company. A company needs to buy a truck to deliver its product to the customers. Now, the A company buys a truck for one hundred thousand dollars. How it would be noted in the accounting journal entries is: the company has bought an asset worth one hundred thousand dollars, while at the same time it has used cash worth one hundred thousand dollars to buy that asset, the Truck.

So, in two entries of the accounting book, in one section, the company has gained an asset, namely the Truck worth one hundred thousand dollars, while also losing cash worth one hundred thousand dollars, which will be noted in the other section.

So, in one account, the cash holdings of company A go down, while in the other account, the assets of company A have gone up.

How to keep an account entry journal

What steps to follow to keep account of journal entry are given in figure 1 below:

Figure 1: How to keep an accounting entries journal

The steps given in figure 1 are as follows:

  1. Keep track of every account affected by a transaction.
  2. Keep note of every account, and which one increases and which one decreases.
  3. Make sure that the numbers add up, and the balance adds up to zero.
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The details of every step are given below:

Follow every account

The first step in account entries is to make sure that you are keeping track of every account.  It is the very first and by far the most important step in the account entry journal. If a single mistake is made here, the rest of the books won’t add up in the end, and the balance would not be zero.

Furthermore, it can cause unforeseen losses to the Company as the unchecked account means you are not able to keep track of the whole financial situation.

 Keeping note of every account is a very difficult and meticulous process and requires a huge amount of practice. So, it helps to be attentive at the start and check multiple times at the start. Because in the end, if the balance is not zero, a huge amount of hours and hard work would have been wasted, and instead of keeping accounts, it would have just created more problems. So, in the end, it pays to be attentive when following each account of a company.

Which account increases or decreases?

Then, the next step is unique for each transaction. Before noting a transaction, you need to remember two things, which account would go up and which account would go down. It makes it easy at the end and also much faster to do it this way.

Which account decreases?

A very simple way to remember which account goes down is by remembering whether you are selling an asset or buying an asset, whether you are paying down your debt or taking on more debt. If you are buying assets, it means your cash holdings would go down unless you are purchasing that asset through debt, which means your assets would go down.

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If you are paying down debt, both your debt and your cash holdings will go down too. So, it is very simple to keep track of the account decrease.

Which account increases?

The process is also very similar to account decrease but with just a slight change. The account holdings would be reversed for account increase. So, when buying an asset, if done through the company’s cash holding, the value of the assets of the company would go up, while if it is down through a loan, both the value of the assets as well as liabilities would go up.

Similarly, if a company pays down its debt, the accounts of the assets would go up, while the value of cash holdings may go down. But, if the company is paying down its debt by selling assets, then we would see a reverse situation of the first scenario is that the accounts of both the assets and debt would go down.

Balance should be zero

It is the final step in keeping an accounting entry journal. It can also be called a confirmation step. It is to make sure that the accounts on both sides match. It is done by matching accounts on both sides, and if both accounts show the same value, it means the transaction record is correct. The balance is zero. It also means that each step that precedes the last step was carried out correctly.

But, if the accounts on both sides do not match or the balance does not come to zero, it means that the preceding steps were not done correctly. It means that the whole process has to be started again.

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The assets and liabilities account must match. That is what is meant by balance should be zero. Even at the final step, precaution is necessary as a simple sum or division can yield the wrong results, so precaution must be kept in mind.

Types of account Entries

There are three main types of account entries which are shown below in figure 2:

Figure 2: Types of account entries

The three main types of accounting entries are transaction, adjusting, and closing entry. All of these are explained below:

Transaction Entry

This is the main type of accounting entry. It is used to record a transaction. Some examples are cash receipts, supplier slips, and invoices.

Adusting Entry

The adjusting entries are done to correct the financial recordings of a company. It is usually done at the end of quarters to consolidate financial reports.

Closing entries

This entry is done to consolidate the financial holdings of a company from temporary accounts into one permanent account. For example, sometimes, companies may hold cash into an escrow accepted under protest because there may be an issue with that transaction. In the end, if all issues are resolved, the cash is transferred from an escrow into the company’s permanent account.

Conclusion

The account entries are an essential part of a corporate work environment. Every company, no matter how big or small, keep an accounting entry journal. It helps them keep track of their financials. Every entry is meticulously checked, which reduces any possible mishaps, and if they happen, they can be easily kept track of. But, extreme attentiveness must be paid when preparing an accounting entry journal.

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