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Journal Entry





A journal entry is a record of a financial transaction in the accounting system. It is the first step in the accounting process. Each journal entry consists of at least one debit and one credit, and the total of the debits must equal the total of the credits.

Importance of Journal Entry:

  1. Recording Transactions: Journal entries provide a record of all financial transactions of a business.
  2. Ensuring Accuracy: Recording all financial transactions through journal entries helps in ensuring that the financial statements of a company are accurate.
  3. Track Financial Activities: Helps in tracking the financial activities of a business.
  4. Legal Requirement: Maintaining a record of all financial transactions is a legal requirement in many jurisdictions.

Types of Journal Entries:

  1. Simple Journal Entry: It involves only two accounts, one account is debited, and another account is credited.
  2. Compound Journal Entry: It involves more than two accounts. For example, when multiple accounts are affected by a business transaction, it is recorded as a compound journal entry.

Examples of Journal Entry:

  1. Purchase of Equipment: Suppose a business buys equipment worth $5,000 on credit. The journal entry for this transaction will be:Equipment (Debit) $5,000 Accounts Payable (Credit) $5,000
  2. Sale of Goods: Suppose a business sells goods worth $10,000 for cash. The journal entry for this transaction will be:Cash (Debit) $10,000 Sales (Credit) $10,000

Issues and Limitations of Journal Entry:

  1. Manual Errors: Journal entries are often recorded manually, and this can lead to errors. Even small mistakes can have a significant impact on the financial statements of a company.
  2. Time Consuming: Recording journal entries for all transactions can be time-consuming, especially for large businesses with numerous transactions.
  3. Complexity: Some transactions can be very complex and may require a deep understanding of accounting principles to record accurately.
  4. Fraud: There is a potential for fraud or manipulation in recording journal entries. For example, an employee with access to the accounting system could record fictitious transactions or manipulate existing entries.

Journal Entry – Visuals

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Journal Entry- Video


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