Meaning of Journal
A journal is a detailed account that records all of a company’s financial activities and is used for future reconciliations and information transfer to other formal accounting records, such as the general ledger. In a double-entry bookkeeping system, a journal records the date of a transaction, which accounts were affected, and the balances.
Types of Journal Entries
There are six different types of journal entries, or seven if you include the archaic, imprecise, and seldom used single entry. Standard accounting, which is based on double-entry, does not employ a single journal entry. It’s better at checkbook balancing than for company accounting, which has a lot of accounts.
Each of the six basic entry types has a different purpose in accounting. They give a balanced, accurate, and unbiased financial account of the organization as a whole. They are as follows:
Opening entries
These entries carry overthe previous accounting period’s ending balance as the current accounting period’s beginning balance. Consider the following scenario: After all liabilities for the preceding accounting period were settled, the closing balance of the Cash account on the balance sheet was Rs. 11000. The opening entry for the current accounting period is that balance of Rs. 11000.
Transfer entries
To move or allocate an expense or income from one account to another transfer entries are used. For example, Reliance Ltd. transfers cash from its primary account to a subsidiary account. A transfer journal entry accounts for the transfer must be made. There is no involvement of a third party in these transactions, and hence all transfers must be net zero.
Closing entries
These entries indicate the completion of an accounting period with a balance that can be moved from a temporary to a permanent account, or from one accounting period to the next. The closing entry in the case of temporary accounts zeros out the account, and any amount remaining is transferred to a more permanent account. After that, the temporary account is closed. Expense and loss accounts, revenue, income, and gain accounts, income summary accounts, and dividend or withdrawal accounts are all examples of temporary accounts. When it comes to accounting periods, the closing entry indicates the account’s final balance at the close of that period. The value is subsequently moved to the next accounting period’s starting entry. It is the accounting period for that account that is closed in this case.
Adjusting entries
Adjusting entries are entries that, in accordance with the accrual method of accounting, reflect changes to accounts that are not otherwise accounted for in the journal. According to matching and revenue recognition principles, these entries are entered in the general ledger at the ending of an accounting period. Accruals, deferrals, and estimations are all common examples. An expense accrual is an expense that is reported in an accounting period but not yet paid. Electricity used by a plant in the month prior to the utility issuing a bill for the firm to pay is an example.
Work that has been completed or products that have been delivered but for which the customer has not been billed is referred to as a revenue accrual. When a payment is made in an accounting period before the item is actually incurred, this is known as an expense deferral. A payment made now for insurance that covers the next six months is an example. When a corporation gets money in advance for services or products that will be provided in the future, this is referred to as deferred revenue.
Compound entries
These entries recordvarious accounts that will be debited or credited. The total of debits and credits must be equal, but the number of credits and debits does not have to be equal, according to the rule of journal entry. There might be one debit but two or more credits, one credit but two or more debits, or even two or more credits and debits. Payroll, for example, may involve a huge number of journal entries that may be summarized in compounded form.
Reversing entries
Reversing entries are created at the start of a new accounting period to reverse, or undo, an adjusting entry made at the completion of the previous period. This option reduces accounting mistakes caused by double-counting expenses or income while also improving the efficiency of processing actual invoices in the next accounting period. To put it another way, they’re utilized to make bookkeeping easier.
Conclusion
A journal is a book of accounts that records every transaction that occurs in a business with precise explanation for it. It is maintained day to day, hence the chances of mistakes occurring are greatly reduced. There are generally six types of journal entries namely, opening entries, transfer entries, closing entries, compound entries, adjusting entries, reversing entries, and each represent a specific purpose for which such entries are made.
