Journal Entry Testing and Why is it Important?

Introduction

In accounting, journal entries are to a big extent one of the most significant abilities to ace. Without legitimate journal entries, organizations’ financial reports would be wrong and a total wreck. If you do not want to risk your accounting career, then read the importance and method of entry testing below.

Understanding Journal Entries

A simple method to comprehend journal entries is to consider Isaac Newton’s third law of motion, which expresses that for each activity there is an equivalent and inverse response. In this way, at whatever point a transaction happens inside an organization, there must be in any event two accounts influenced.

For instance, if an organization purchased a vehicle, the organization’s assets would go up by the estimation of the vehicle. In any case, there should be an extra account that changes (i.e., the equivalent and inverse response).

The other account that is influenced is the organization’s money going down in light of the fact that they utilized the money to buy the vehicle.

At long last, much the same as how the size of the powers on the primary object must be equal to that of the subsequent item, the charges and credits of each journal entry must be equivalent.

A journal is the organization’s legitimate book wherein all transactions are recorded in sequential order. Even though numerous organizations use account programming these days to book journal entries, journals were the dominating technique for booking previously.

In each journal entry that is recorded, the charges and attributes must be equivalent to guarantee that the bookkeeping equation (Assets = Liabilities + Shareholders’ Equity) stays inequality. While doing journal entries, we should consistently think about four variables:

  • Which accounts are influenced by the money exchanges
  • For each account, decide whether it is expanded or diminished
  • For each account, decide the amount it is changed
  • Ensure that the bookkeeping equation remains in balance

The most ideal approach to ace journal entries is through training. Here are various examples that outline some normal journal entries. The primary example is a finished walkthrough of the cycle.

Examples of journal entries

Example 1 – Buying the inventory journal entry

Bought stock costing $15,000 for $5,000 in cash and the remaining $80,000 is recorded in the record

DR Inventory15,000 
CR Cash 5,000
CR Accounts Payable 10,000

Example 2 – Getting land journal entry

Bought land costing of $60,000 and buildings for $400,000. Gave $100,000 in cash and marked a note payable for the equalization.

DR Land60,000 
DR Buildings200,000 
CR Cash 100,000
CR Note payable 340,000

Method to Track Journal Entries

A huge part of accounting includes monetary reporting. Financial reporting is the demonstration of introducing an organization’s financial summaries to the board, management, the government, and different clients to assist them with settling on better money related choices.

So as to decide the last money related estimation of accounts that are recorded on the financial summaries on the organization’s year-end, various journal entries are recorded and followed in an account known as a T-account, which is a visual portrayal of the general ledger account.

The suitable charges and credits are recorded under the fitting sections under these T-Accounts to decide the last incentive to be accounted for.

Why are journal entries important to careers in accounting?

Despite the fact that recording journal entries can be exceptionally tedious and dull, recording precise entries at the perfect time is basic for organizations to show their right budgetary status to individuals inside the firm as well as to outer clients and users.

With incorrect entries, organizations might be seen to have more obligation or less obligation or as more productive or less gainful than they really are. Thus, this could lead organizations and financial specialists to settle on choices dependent on bogus, deceiving data, prompting negative consequences.

Having what it takes to record and comprehend journal entries is fundamental in any vocation in Accounting, regardless of whether you are associated with public practice and are taking a shot at a customer’s audit file, or you are working in an industry and assisting with setting up an organization’s fiscal statements.

Conclusion

In basic terms, the initial step to appropriate financial reporting vigorously depends on recording precise journal entries.

Following the method explained in this article will be very advantageous for your accounting career. This is because recording journal entries is a skill that should be practiced and understood by everyone in the field.

Recurring Journal Entries

Concept of Recurring Journal Entry:

To understand what a recurring journal entry is, it is necessary to discern the theory of journal entries. Journal entries are the initial influx of business transactions in their books.

A journal entry has a dual-sided effect that amends figures in two distinct accounting heads in books of business.

It is imported in the general ledger which is then used to prepare financial statements of the company. Journal entry is, therefore, the foundation of the Company’s financial statements.

Recurring Journal Entries:

Recurring journal entries are associated with transactions of expense, income, cash, or non-cash transactions that appear periodically every month, quarter or year.

These are typically used to record the most usual transactions that occur every period. Some illustrations which explain the notion of recurring journal entries are depreciation that is integrated once in a year debits the depreciation expense and credits the accumulated depreciation which in turn diminishes the value of the asset, hence a dual effect.

Insurance premiums which are paid monthly, quarterly or even annually, debit the insurance expense account while credits the corresponding cash or payable account, again a dual projection on books of the organization.

How does Recurring Journal Entries work?

Companies implant the effect of recurring journal entries over a proper carrier to correctly record its fallout. Organizations need to decide about the journal entries to automate in their books.

These journal entries can be automated in cloud accounting systems, computerized processes or manual accounting systems of the organization. When businesses develop a transaction which they feel should be projected in every period, is infused through the system.

This process of placing of journal entry will repeat itself in every applicable period. As the business has to implement the effect of every journal entry, this automation will hit the dual accounting heads every period.

This effect will result in amending the general ledger figures at different places and therefore affecting the company’s financial statements.

Same account but different amount journal entries:

There are some occurrences in which the recurring journal entries alike have the same nature in every cycle, but cannot be mechanized because of the varying monetary amount.

These are the journal entries that need manual entry by bookkeepers to report them in business books. One case of this is the varying lease payments in which periodical payments such as principal and interest vary with time but its nature remains the same.

The types of recurring journal entries count on the nature of business. There are a few accounting heads that every business follows. Some of these journal entries comprise of depreciation, interest expense payments, loan principle repayments, etc.

Some journal entries are explicitly designed for the business for their intrinsic desire. These are recurring journal entries that are pursued by businesses because they are bound to do them.

One example of this is lease interest and principle payments which are assimilated only by businesses who have entered a lease deal.

Recurring journal entries are therefore followed by businesses to implement the same nature transactions in every period. These may or may not have the same monetary value but they must have the same nature.

As explained above, let’s say depreciation which occurs every period and hence the organization is bound to consider it in their books.

Non-Recurring Journal Entries

Overview:

The primary contrast among the accounting of recurring and nonrecurring transactions can best be comprehended as the distinction between normal, fixed costs an organization hopes to have on a progressing premise versus costs that happen one-time or phenomenally.

The detailed discussion regarding non-recurring transactions along with relevant examples are explained below:

Non-Recurring Transactions

The non-recurring costs are the more complex transactions that are not required for running an organization in the organization’s line of business but are occurred as supplementary events.

These non-recurring transactions usually appear on the indirect costs section of the income statement of the company for the year. Each organization will deal with the recording of non-recurring transactions if occurred, dependent on the individual activities of their business.

Non-Recurring transactions sometimes become a part of the statement of financial position and the statement of cash flow of the organization.

On the statement of financial position, these transactions will be reported as either assets or liabilities and these may be further be classified as short-term assets or liabilities or long-term assets or liabilities.

While, on the statement of cash flow, the recurring transactions are mostly represented in operating activities.

The journal entries of non-recurring transactions of an organization are related to unusual costs or events that are do not take place again and again in each bookkeeping period, in fact, these events take place only once or in a regular manner.

The recording of non-recurring transactions usually includes the recording of mergers, acquisitions, purchase of the real estate, etc.

By and large, non-recurring transactions can be significant for speculators to note when breaking down an organization’s fiscal summaries since the executives have some adaptability in detailing these costs, and such costs may fundamentally slant an organization’s productivity for the bookkeeping time frame.

Journal Entries

The Journal Entries of recurring transactions of an organization are recorded in each bookkeeping period.

For instance, an organization giving month to month budget reports may record impairment or depreciation by charging Depreciation Expense for $5,000 and crediting Accumulated Depreciation for $5,000 every single month.

In the event that the records and the sums are indistinguishable every month, the common diary passage may be alluded to as a retained section if the bookkeeping programming produces and records the journal entry.

Other repeating sections will include the indistinguishable records, yet the sums will be diverse in each bookkeeping period.

A model is the finance section. Every finance entry will have similar accounts yet various sums because of the number of hours worked.

Different instances of repeating passages with sums that vary every period incorporate deals, the premium earned, premium cost, bank administration charges, etc.

The term non-recurring journal entries can likewise allude to non-repeating or irregular journal entries where the records are distinguishable and fluctuate by month.

For instance, the journal entries to record property purchase costs will be recorded in the statement of financial position and it is not a repeating event.

Accounting for credit and cash purchase transactions

Overview:

Entity purchases goods or renders services to run its business every day and some of those purchasing transactions are on credit while others maybe pay by cash immediately.

Most of the purchases including raw materials, offices supplies as well as fixed assets.

All of these purchasing needs to records in the entity’s accounting system so that management could have the proper reports about its expenses and for management purposes.

The following are the accounting records for both purchases on credit and cash purchases.

Cash purchases:

Cash purchases are happened when entity make a purchase of goods or renders the services and then make the payments by cash immediately.

Most of the business prefer to make the payments by banks transactions so that the fraud case might be minimize. And sometime, entity’s management want to manage its cash flow by keeping delay to pay later or obtain long credit term.

For cash purchase, entity mostly use petty cash to make payments and for small items only. For larges purchase, they normally purchase on credit and make payments by banks transactions.

If the purchase are paid by cash, accounting transactions will be like this:

Debit Expenses or Assets based on products/material purchased ($ XXXX)

Credit Cash ($XXXX)

As you can see, cash will be reduces since the entity make the payments to suppliers and reduce of cash should be recording in credit.

Others entry is expenses or asset. It is depending on what items that entity purchase. For example, if the purchase item is office supplies, expenses is the account that should be recorded into.

However, if computers are the items that entity purchase, then fixed assets is the account that the entity should be recording into.

Credit Purchase:

Credit purchase is happened when entity make the purchase on goods or services and then make the payments later. In this case, entity also need to records the transaction even thought the payments are not make the the supplier yet.

For the credit purchase, there is no transactions related to the cash yet at the time of purchase. Yet, the transactions will affect at the time of pay payments.

The account that affect the credit purchase at the time purchasing are account payable and the corresponding accounts like expenses and assets.

The following is the example of credit purchase transactions:

Debit Expenses or Assets based on products/material purchased ($ XXXX)

Account Payable ($XXXX)

As you can see, the two importance account that affect at the time of purchasing are account payable (maybe the suppliers account) and office supplies expenses, assets items or expenses.

If entity purchase office supplies for its operation. And it does not make payments at the time of purchasing.

In this case, entity need to recognize both expenses and account payable at the same times.

Both of these accounts are increasing at the time with the same amount. However, officer supplies are increase in debit and account payable are increase in credit.

Office supplies will affect directly to the operating expenses in income statement.

And account payable will be reduced when entity make payments to suppliers. It is depending what types of payments channel that entity want to pay. By cash or bank transactions.

If the payments is by bank, then the accounting transactions will be like:

Debit account payable = $XXX

Credit Banks = $XXX

If the payment is by cash, then the accounting transactions will be like:

Debit account payable = $XXX

Credit cash = $XXX

What is purchase journal?

Overview:

Purchase journal is the special journal that use to records all of the transactions related to purchases on credit.

This special journal is prepared for the purpose of reduce the large of transactions in general journal. And it is normally prepare only if the entity has a lot of purchases on credit transactions.

If there is small amount of transactions of credit purchases, then entity might records the purchase journal together with others transactions.

Purchases on credits are any purchase of products or render of services that entity take the products or users the services now and pay later. Accounting principle required entity to records all of those transactions as liabilities.

Explanation and Example:

Entity might purchases goods or services and make the payments immediately to suppliers by cash.

In this case, entity should not records these transactions in these journal. It should records in the cash payments transactions.

Entity use purchase journal only when it use manual to records accounting information. However, if entity use accounting system to records it accounting and financial information, purchase journal is not required.

The main information that should have in the purchase journal including name of the entity, accounting period, date, suppliers accounts, invoices date, payments terms.

The correspondence accounts that should be recording included account payable, inventories, expenses, and others related accounts.

Recordings of these transactions should be follow debit and credit role. For example, credit purchase should be increase in credit as it is the liabilities. If those purchase are for inventories, then inventories accounts should be debited.

All of the purchase on credit transactions are posting to this journal on order by date. And all you need to entry are date, name of suppliers, supplies accounts, invoices identification, description of transactions, and amounts.

Some time, entity also include others information that related to purchase like fixed assets, inventories, or expenses.

Purchase journal Entries:

For example, this week entity purchase 10 computers amount USD 10,000 on credit from local supplier.

In this case, the account that involve with this entries including Fixed Assets (to record 10 computers) and Account payable.

Here is the example,

Debit Fixed assets amount USD 10,000

Credit Account Payable amount USD 10,000

(Memo: Purchase 10 computers on credit)

When the entity make payment for this 10 computers, then the accounting records will be as follow:

Debit account payable amount USD10,000

Credit cash/bank amount US10,000

(Memo: Payments to suppliers for USD10,000)

What is the cash payment journal?

Overview:

Cash payments journal is the special journal that uses to records all the payments that entity made by cash.

This special journal is created when the entity makes the accounting records by using an accounting manual and there are a lot of cash payments transactions that occur.

Especially when there are large cash payments transactions occur in the business every day.

Records these transactions separately from the general journal help the entity to reduce the large amounts of transactions from the general journal.

Explanation and Example:

If an entity using an accounting system to records is accounting information, all of the financial transactions are records in the system by making the journal entries and all of the entries will directly affect the financial statements and other books like general ledgers and trial balance.

Cash payments journal records only cash outflow payments while cash collection is recording in the cash receipt journal.

The common cash payments transactions that record in this journal are paying to creditors, payments to suppliers, payments to the employee as well as a fund that return to customers.

If the entity makes credit purchases, then all the purchases are recordings in the purchase journal.

The cash payments journal is not much different from another special journal. Its main objective is to make collect all the similar types of transactions together.

And the key information that includes in this journal is the entity name and accounting period that these cash transactions have occurred.

Accounting number and accounting reference is also the importance and should be included. Debit and credit for both cash accounts and its correspondence accounts should also include.

The key information that should contain in this journal is the name of accounts, Accounting Reference, debit amount and credit amount.

Credit amount is obviously cash while the debit amount is normally expenses or assets that the payments are made to.

For example, if the payments are made for wages expenses, then the debit account should be the wage account.

Cash payment journal:

For example, the company makes payments to workers on the workers’ wages amounts to USD500,000 in cash.

In this case, the cash payment journal would be,

Debit workers’ wages amount USD 500,000

Debit Cash on hand amount USD 500,000

(Memo: workers’ wages for July 2017)

Another example related to the cash payment journal: Company makes payment to the supplier for the company’s car that purchased last week amount of USD 50,000 by cash.

In this case, we expected that the company already record the account payable to the supplier for purchasing company car amount USD 50,000.

In this case, we record as following:

Debit account payable ( supplier name maybe) amount USD 50,000

Credit cash amount USD 50,000

(Memo: Payment for a company car)

However, if the company fail to recognize account payable for USD50,000, the recording should be as follow:

Debit fixed assets ( car is the fixed assets) USD 50,000

Credit cash USD 50,000

(Memo: Payment for the company’s car)

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