Today's video is all about Journal Entries. You know sometimes those T Accounts just don't
cut it. I'm gonna explain why, show you an alternative and take you through an example
that will make this all seem like a walk in the park.
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Hey guys, I'm James and welcome back to another
episode of Accounting Stuff. Today's video is the fourth in the series that I'm creating
on Accounting Basics. I’ve be getting loads of positive comments from you guys so far
so thank you, I really appreciate it, and I'm glad these videos could help you out.
If you missed out on any there's a link to them in the description below. I'm going to
start putting these videos up on a weekly basis, so if you haven't already, hit that
BIG SUBSCRIBE button so you don't miss out on the next one. So… what are Journal Entries?
Let's find out. In the previous video, I showed you that a
T Account is a visual representation of an account, and how to record transactions using
them. However in day-to-day life T Accounts aren't that practical to use as they take
up lots of space and it’s easy to miss a side of a transaction. We need another, more
efficient method for recording our transactions. But, why is it important to record our transactions?
First, you can use Financial Reports to measure the performance of your business to see if
you're doing well or badly. Second, it enables you to manage your cash
flow so that you don't run out of it. Third, it's helpful to keep things organised.
It's also useful at tax time to avoid missing out on any deductions.
And finally, if your business were to get Audited, it's handy to have that paperwork
ready. In fact, the process of recording all Financial
Transactions is so important that we have a word for it… Bookkeeping.
Bookkeeping can be done on any budget, no matter how big your business is. Here are
a few examples of some different Accounting Software packages that you can use on different
budgets. I will throw the links to a few of these in the description below.
Now that we know why Bookkeeping is important we need a method to record transactions. Earlier
I said that T Accounts are impractical so we're going to have to try out something else.
Journal Entries So what are Journal Entries?
A Journal Entry, or “JE” when abbreviated, is a record of a financial transaction, and
it looks like this. First, we have the journal number. This is
a unique reference number that is used to identify the journal.
Then, there is the journal entry date. This is the date that the journal is posted in
the General Ledger. It's important, because it affects the Accounting Period that the
transaction is going to show up in. Next, we have the names of the Accounts that
are impacted by the journal. In this case… Cash and Owner's Equity
Notice that Owner's Equity is indented? We indent the name of the Account that is getting
credited, so that it is easier to see. Then we have separate columns for all of the
Debit and Credit entries. And finally, there is the journal description
below. It's good practice to give a solid explanation here since you may need to refer
back to the journal in the future, and a good description will make it much easier to remind
yourself why you entered it in the first place. Remember, we're talking Double-Entry Bookkeeping,
so there must be at least two sides to the journal, and the totals of those Debit and
Credit columns must match each other exactly, because the Accounting Equation always balances.
If you're using Accounting Software like QuickBooks or any of those other ones that I mentioned
to you previously, it usually won't let you post the journal unless the Debits and Credits
match each other exactly, since this is a key control.
However if you're using Sheets or Excel, then you're on your own and you'll need to watch
out for this. There are two types of journal
Automatic journals and Manual journals Automatic journals only exist when you're
using Accounting Software. These can save you loads of time by posting automatically
behind the scenes as you enter invoices and receive payments.
On the other hand, Manual journals are typically only used for adjusting entries and unique
transactions. You need to fill out all the fields in a template
like the one I showed you earlier by yourself. Right, I think it's time for that example
I promised at the start. In last week's video, I started my own Window Cleaning business.
It's been up and running for a week now and it's going well but my equipment is getting
all gross and dirty so I need to go get it cleaned.
I take it to the Laundry, and they charge me twenty dollars.
I pay them in cash In order to do this, we're going to need one
of those journal templates. First we need a unique journal entry number
so that we can identify this transaction. We discussed our first five transactions in
the previous video, so let's call this one number six.
The journal entry date should be today, the 21st of September, since that is when the
equipment was cleaned. So this transaction is going to show up in
the September Accounting Period. Next, we need the account names that are impacted
by this journal. In this case, we're talking Laundry Costs
and Cash Laundry Costs are an Expense.
That's the first E in DEALER, so Debits increase it.
They charged me $20, so I need to put this number in the Debit column.
Cash is an Asset, that's the A in DEALER, so Credits decrease it.
We need to indent the account description for Cash to help us identify it as a Credit
and we're going to need to put $20 in the Credit column.
Finally, we need to give this journal a description. Let's call it “Laundry Costs - Week One”.
Great, so now that journal is all prepped up, it's ready to be posted in the General
Ledger. Our work here is done.
Let's recap what we just learned there. Bookkeeping is the recording of all financial
transactions in a business. A Journal is a record of a financial transaction.
The totals of the Debit and Credit columns always match.
Automatic journals are used in Accounting Software to save you time.
And finally, Manual journals are used for adjusting entries and unique transactions.
Question of the day… if you've got a Start Up or you're running a Small Business then
what Accounting Software are you using? As I mentioned in the beginning I appreciate
all your comments, so thank you again. If you found this one useful, hit that Like
button and don't forget to Subscribe, I would love for you to come and join us.
That’s all for today, good luck with those journals and see you next week!
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