What is Journal Entry

What is Journal Entry 

The Journal, also called the Book of Primary Entry, is the first record of any transaction in a business. The information in these simple journal entries is then transferred to the other books of accounts. 

Wondering how the journal entry pulls this off? Let’s take a look at how journal entries work.

How does a Journal Entry work?

Journal entry works on the double entry principle. In short, this means that every transaction has two sides. Both sides have equal importance, and both must be recorded. 

For example, if the owner of Razor Bakery buys sugar worth Rs 50, she is deducting Rs 50 from her cash balance, but adding Rs 50 worth of sugar to her sugar balance.

A journal entry records both sides of this transaction in the form of a debit and credit value. 

Read more: Double Entry System of Accounting 

Debit is any value that is added to the business, and credit is any value that is deducted from the business.

In Razor Bakery’s example, sugar is debited, and cash is credited. 

It is easier to understand the concept of debits and credits if you visualize different buckets. 

When Mrs. Pay bought sugar, he transferred Rs 50 from her cash bucket to her sugar bucket. Now, if you rename “bucket” to “account”, you have the double entry system.

Format of a Journal Entry

Here is how Mrs. Pay’s sugar purchase would be recorded in the Journal.

Entry 1

Here are the rules that a journal entry must follow: 

• There must be a minimum of two accounts in the transaction. 
• Both debit and credit values should be equal

Types of Journal Entry

Simple Journal Entry

Journal entries with only two accounts are called simple journal entries. We saw an example of this earlier.

Compound Journal Entry

A journal entry involving more than two accounts is called a compound journal entry. Here is an example:

Adjusting Journal Entry

There is another kind of journal entry called the adjusting journal entry. To understand adjusting journal entries, let’s continue with the above example where Mrs. Pay paid for sugar with both cash and credit. 

Two weeks later, Mrs. Pay finally cleared her dues of Rs 30 with the sugar seller. This means that she pays Rs 30 in cash. 

Here are the two sides of the transaction when Mrs. Pay clears her dues of Rs 30 with the sugar seller. 

Accounts Payable A/c – Rs 30 Debited (added)

Cash A/c Credited – Rs 30 (deducted)

Here is the journal entry:

Entry 3 

Remember how debits are additions and credits are deductions? Since the Accounts Payable account has Rs 30 in both debit and credit, it cancels out to a net value of zero!

This is an adjusting journal entry. 

Examples of Journal Entry

Here are a few examples of how your business’s journal entries might look. 

• Sales of goods or services for cash

Cash has been added to the business, so we debit cash.

Goods have been deducted from the business, so we credit goods. 

• Payment of lease for property or equipment

When your business pays to lease out a building or machinery for its daily operations, here are the two parts of the transaction. 

The building/machine has been added to the business, so we debit building/machine

If your business paid for the building/machine with cash, then cash has been deducted, so we credit cash. 

If your business paid for the building/machine with a loan or if you are due to pay the lease, then we credit the lease payable account.  

Today, there are some really cool accounting software on the market that help founders and accountants maintain books of accounts without having to manually enter every single transaction. 

Unfortunately, all your business’s payments and receipts happen through your bank account – and most banks don’t integrate with accounting software. 

This means that businesses spend a lot of time and effort entering all their financial transactions on accounting software manually.

Fortunately, RazorpayX has a solution for smart business owners!

Our super-smart Current Accounts integrate smoothly with Tally, Zohobooks, and Quickbooks, meaning you get a seamless, 2-way sync. 

Every transaction you make with your RazorpayX Current Account automatically gets added to your accounting software of choice! 

No manual entry, no errors, and no wasted time. 

RazorpayX Current Accounts have a lot more to offer, too. Interested? 

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