Journal Entries – What You Need To Know

Accounting journals are used to record all the financial transactions of a business from sales to purchases and everything in between. In most companies of today’s computerized world, journal entries are automated. In order to understand the basic premise of accounting, it’s important to know how manual journal entry works. The reader should also have a basic understanding of debits and credits before learning manual journal entry.

Types of Bookkeeping Journals

According to the New York State Society of CPAs a journal is “any book containing original entries of daily financial transactions”. For the most common types of financial business transactions, most companies have a specific book that’s used. The various types that are used largely depend on the business model. The most common types of journals used are the

  • cash receipts journal
  • cash payments journal
  • sales journal
  • purchases journal
  • general journal.

Journals Used for Sales Transaction Entries

Generally the two most common books used for sales entries are the cash receipts journal and the sales journal. The sales journal is used for goods and services that are sold on open account. The two general ledgers that are always used are sales and accounts receivable (AR). Inventory and the reciprocal account, cost of sales, sales tax and freight may also be used along with other GL accounts depending on the business model.

Sales Journal Entry Example

  • 12-05 Brown Company, invoice 123 – $100 AR debit, $100 sales credit
  • 12-05 Green Inc., invoice 124 – $250 AR debit, $250 sales credit
  • 12-05 Clausen LTD, invoice 125 – $175 AR debit, $175 sales credit

The cash receipts journal is used for goods and services paid by cash, receipt of cash on accounts receivable and any other incoming cash. A retail business that deals strictly in cash normally would not use the sales journal. The most common GL accounts used with the cash receipts journal are cash, sales and accounts receivable.

Cash Receipts Journal Entry Example

  • 1-05 cash sale, invoice 198 – $25 cash debit, $25 sales credit
  • 1-05 Brown Company payment, $100 cash debit, $100 AR credit
  • 1-05 cash sale, invoice 201 – $50 cash debit, $50 sales credit

Purchases and Cash Payment Journal Entry

The purchases journal is used for items bought on open account. Since this book is used for open account purchases, accounts payable (AP) is affected by each transaction. Offsetting common GL accounts where purchases are made usually have separate columns for those transactions. Beside a column for AP, other common GL columns may include inventory and expense accounts.

Purchases Journal Entry Example

  • 12-05 ABC Corp., invoice 3945 – $800 inventory debit, $800 AP credit
  • 12-05 Fast Shipping, invoice 432 – $100 freight expense debit, $100 AP credit
  • 12-05 Office Stuff Inc., invoice 980 – $75 office expense debit, $75 AP credit

The cash payments journal is for outgoing cash transactions. The most common GL account for this book besides cash is generally accounts payable. Most companies will have a column for cash, accounts payable and miscellaneous. In some instances the check register doubles as the cash payments journal.

Cash Payment Entry Example

  • 1-05 ABC Corp. – $800 AP debit, $800 cash credit
  • 1-05 Fast Shipping – $100 AP debit, $100 cash credit
  • 1-05 Office Stuff Inc. – $75 AP debit, $75 cash credit
  • 1-05 Fancy Products – $200 inventory debit, $200 cash credit
  • 1-05 Joe the Plumber – $150 building maintenance debit, $150 cash credit

When a financial transaction occurs and no other journal is appropriate, the general journal is used. When the general journal is used, a written detailed explanation should be made for each financial transaction. The general journal is also used when adjusting entries are made at the end of an accounting period.

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