Journal Entry

Definition

A journal entry is a record of a financial transaction in the accounting books of a business. It involves debiting one or more accounts and crediting one or more accounts, ensuring that the accounting equation remains in balance. Journal entries are the building blocks of the accounting process and are essential for accurately tracking a company's financial activities.

5 Must Know Facts For Your Next Test

1. Journal entries are used to record transactions in both perpetual and periodic inventory systems.
2. Special journals, such as sales, purchases, cash receipts, and cash disbursements journals, are used to record common types of transactions more efficiently.
3. In a perpetual inventory system, journal entries are used to record the cost of goods sold and update the ending inventory balance.
4. Journal entries are used to record and report current liabilities, such as accounts payable, accrued expenses, and unearned revenue.
5. Journal entries are necessary to record the effects of cash dividends, property dividends, stock dividends, and stock splits on the financial statements.

Review Questions

• Explain how journal entries are used to record transactions in a perpetual inventory system.
  • In a perpetual inventory system, journal entries are used to record the cost of goods sold and update the ending inventory balance. When a sale occurs, a journal entry is made to debit the cost of goods sold account and credit the inventory account, reflecting the decrease in inventory and the cost of the goods sold. Similarly, when inventory is purchased, a journal entry is made to debit the inventory account and credit the appropriate accounts, such as accounts payable or cash, to record the increase in inventory.
• Analyze how journal entries are used to record current liabilities.
  • Journal entries are essential for recording and reporting current liabilities, such as accounts payable, accrued expenses, and unearned revenue. When a company incurs a liability, a journal entry is made to debit the appropriate expense or asset account and credit the current liability account. For example, when a company incurs an expense but has not yet paid for it, a journal entry is made to debit the expense account and credit the accounts payable account. Similarly, when a company receives payment for a service that has not yet been rendered, a journal entry is made to debit the cash account and credit the unearned revenue account.
• Evaluate the role of journal entries in recording transactions related to cash dividends, property dividends, stock dividends, and stock splits.
  • Journal entries are crucial for recording the effects of cash dividends, property dividends, stock dividends, and stock splits on the financial statements. When a company declares and pays a cash dividend, a journal entry is made to debit the retained earnings account and credit the cash account. For a property dividend, a journal entry is made to debit the asset account being distributed and credit the appropriate equity account. In the case of a stock dividend, a journal entry is made to debit the retained earnings account and credit the common stock account. Finally, for a stock split, a journal entry is made to debit the common stock account and credit the common stock account, reflecting the increase in the number of shares outstanding without affecting the total amount of stockholders' equity.

Related terms

General Journal:

The primary accounting journal where all business transactions are initially recorded in chronological order.

General Ledger:

The main accounting record that organizes and summarizes all the transactions recorded in the various journals.

Double-Entry Accounting:

The system of accounting where every transaction is recorded with a debit and a corresponding credit, ensuring the accounting equation remains balanced.