Steps to Record Journal Entries for Your Business.
Appropriately prepared journal entries ensure all financial transactions are accurately recorded. You can begin by zeroing in on which transactions should be entered where. Accounting software will play a crucial role over here as it will enable you to automate journal entries by fetching data from various financial reports and statements.
On the contrary, if you rely on manual bookkeeping methods, you will have to identify each transaction impacting the company’s books.
Here’s a detailed approach for creating journal entries:
1. Find the impacted accounts
Begin the process by identifying which accounts are affected by the transaction. This process can be cumbersome if you aren’t conversant with accounting rules, principles, and terms. In this step, your primary objective is to identify which accounts will gain and which ones will lose during the transaction.
2. Classify transactions
The second step is to sort transactions based on various types, including bank deposits, expenses, purchases, borrowings, credits, and taxes. It will enable you to record these transactions as per accounting rules.
3. Track and trace the money
In this step, consider how it impacts values in terms of debits and credits in associated accounts. Ask yourself the following questions about the transactions:
i. What is the source of the money?
ii. What is the destination of the money?
iii. What did it add to the business?
iv. What did it take away from the business?
4. Identify your account type
Some transactions are simpler to map based on the debits and credits across various affected accounts. Rest may be a little more complicated to track. Remember the following points to assist you in determining the account type:
i. Learn about various account types. There are 5 basic account types: expense, liabilities, revenue, equity, and assets. Once you understand the aforementioned types, you will learn how various kinds of transactions impact them and how they relate to each other.
ii. Apply standard accounting rules to decide where to apply for debits and credits. In journal entries and financial reports, well-established accounting rules allow companies to standardize what goes where. For example, it helps decide where to apply credits and debits for a particular journal entry.
5. Build your journal entry
Adhere to the following process to prepare your journal entry:
i. Put the correct date. Correct date ensures that the data stored in journal entries are applied to the suitable accounting period.
ii. Allocate code and account name. Transactions are coded to a particular account to simplify the accounting process. And accounts are identified using a unique general ledger code and name.
iii. Enter the credit and debit amounts: One of the most significant benefits of using accounting software is automating the debiting and crediting of journal entries. On the contrary, if you are managing them manually, there is a high chance that they will be full of errors.
Self manual capture may require a review from someone qualified such as a bookkeeper or an accountant. You can hire them periodically if you are not ready to outsource the function altogether. This is to make sure that the reports are accurate and reveal the true status of the company.
Compiled by Ms. Dikeledi Seoloane on behalf of Matsobanemetja Business Consulting (Pty) Ltd – Registered Accountant and Certified Tax Practitioner.
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