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. [Music] 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! [Music]