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A journal entry in accounting serves as the fundamental record-keeping mechanism for all financial transactions within a company.
A journal entry is the meticulous documentation of financial transactions in the accounting system. What distinguishes it is the adherence to the principle of double-entry bookkeeping. Every journal entry consists of two parts – a debit entry on the left side and a credit entry on the right side. This ensures a balanced and accurate representation of a company’s financial activities.
Debit and credit
In the language of accounting, the left side of a journal entry is commonly referred to as the “debit” side, denoted with a plus sign. Conversely, the right side is known as the “credit” side, marked with a minus sign. Debits and credits represent the inflow and outflow of value within the company.
Understanding debits and credits
A debit entry signifies the acquisition of value or income within the company, such as when a product or service is sold. On the other hand, a credit entry represents the exit of money from the company, such as when expenses are paid or assets are purchased.
How to record a transaction
To illustrate the process of posting in the accounting software, consider the scenario where a work phone is purchased for $6000. Two entries are required to accurately capture this transaction. The first entry, a debit, records the acquisition of the work phone and specifies the account where the value is deposited (e.g., a relevant asset account). Simultaneously, the second entry, a credit, documents the payment for the phone from the bank account, indicating a reduction in the cash or bank account. This dual-entry system maintains the balance of the accounting ledger.
Maintaining balance
In essence, every journal entry reflects either the expenditure of money or the origin of funds within the company. This meticulous recording ensures that the accounting system remains balanced and provides an accurate representation of a company’s financial health.