What is a journal entry?

When do you need a journal entry?

Most of what goes into a set of books arrives on its own: a sale is recorded when the invoice is raised, a cost when the bill or bank payment is entered. A journal is for everything else — the entries that exist because the accounts need them rather than because money moved.

The usual candidates are month-end and year-end adjustments. Depreciation spreads the cost of a van over its useful life. An accrual recognises a cost that belongs to this period even though the invoice has not turned up. A prepayment pushes a cost paid in advance into the months it actually covers. Correcting a posting to the wrong account is also a journal.

Each one names at least two accounts, the amount going to each, and which side it lands on. Total debits must equal total credits or the ledger will not accept it. That constraint is the whole point: a journal cannot create or lose value, only move it.

A worked example

A consultancy pays £1,200 for a year's professional indemnity insurance on 1 April. The bank transaction records the £1,200 leaving, but charging the whole cost to April would make April look terrible and the following eleven months look better than they were.

So the payment is posted to a prepayments account on the balance sheet, and each month a journal moves one twelfth into the insurance expense: debit insurance £100, credit prepayments £100. After twelve months the prepayment is nil and the expense has been spread evenly.

The same shape handles depreciation. A £12,000 van written off over four years needs a monthly journal of debit depreciation £250, credit accumulated depreciation £250. No cash moves; the accounts simply reflect that a quarter of a year of van has been used up.

What goes wrong with journals?

Journals bypass the usual paper trail, which makes them the easiest place to hide a mistake or, occasionally, something worse. Every one should have a narrative explaining why it exists, and anyone reviewing the accounts will look at the journals first.

The other common problem is the journal that never gets reversed. An accrual for a £600 bill expected in March should be reversed when the real bill arrives in April; forget, and the cost is counted twice. Bizzle logs every automated journal it posts and can reverse any of them, which removes most of the tedium and all of the mystery.