journal entry, its merits and limitations

Journal entry is the first step in the accounting cycle. It is the step to record the business transactions in a date-wise manner or other manner suited to an entity. Every journal entry will be based on the concept of double-entry which means that there should be debit and credit for the account and amount.

For example, if a business pays rent of USD.50 then the journal entry would be like:

Debit

Rent expenses -  50 USD

Credit

Cash/Bank

 

Debit means just the left hand while credit means the right hand as it has no other meaning which clearly explains what the debit and credit is but just the left side and right side of an entry are called debit and credit so every journal entry would be based on the debit and credit.

In each journal entry, the businesses specify the date, description, reference number of ledger debit, and credit of the respective account and amount. The standard format of the book of a journal entry is as follows:

Date

Description

Ref. No

Debit

Credit

1/1/20x1

Rent expense

To cash

Narration: (Being amount paid o account of rent expense)

12

14

50

 

50

 

Date

In the journal the date is mentioned while recording the transaction which should clearly show the date at which it occurs because the business should record the current year’s transaction in books of accounts not the post year transactions like the business year ended is at 31 December so it cannot post the next month transaction, let's say January transaction in the month of December because of the cut off assertion. Therefore, the date should be mentioned with each journal entry to ensure that only relevant period transactions are recorded in the books of accounts.

Description

The description is about the explanation of the transaction like it clearly tells about the accounts involved in a journal entry and provides a more clear picture of the transaction. Along with the description, there should be a narration of a few lines to tell more about the transaction and its nature.

Reference number

The reference means that the account involved in the journal entry is located on the given ledger number because each ledger is numbered for convenience so to locate the effect of the journal entry one has to check the relevant ledger with the given reference number. The description for the ledger reference can be different as different businesses use different terminologies for it like some businesses use the terminology of “Ledger folio” for it etc.

Debit column

In the debit column, the relevant amount is recorded in this column which means that the account head is debited with a given value. Again debit means just the left side of the entry as it has no other meaning to explain what debt actually means.

Credit column

In the credit column, the relevant amount is recorded in this column which means that the account head is credited with a given value. Again credit means just the right side of the entry as it has no other meaning to explain what credit actually means.

In old days the businesses were used to record the journal entry in physical books of accounts there was a large register which accountants use to record the journal entries and likewise, the ledger was also on the physical books of accounts but different accounting software like “QuickBooks”, “SAP financial module” and other software made this work too easy for the businesses and of course for the accountants. In modern accounting software the accountant needs to just record the journal entry and then software post it to a relevant ledger and thereafter in the trial balance and financials too. The only thing the business needs is to give proper coding to the relevant accounts so that no entry is mixed up and remained missed.

Following are the advantages and limitations of the journal entry

Advantages of the journal in accounting:

=> It records the transaction as and when occurs means recording the transaction in respect of the occurrence of the time and date.

=> It records the transaction in chronological order, which means it records the transaction as it happens not recording in a mixed-up manner.

=> It helps to minimize the errors in the recording of the transactions since the transactions are recorded in chronological order.

=> Journal entry provides the explanation for the transaction in the form of narration which means that the managers or any non-accounting professional can get about the nature of the transaction.

Limitations of the journal in accounting:

=> The work of a journal is too hectic when there is a large number of transactions, especially this happens when the organization is a large size and there are thousands or hundreds of transactions per day.

=> The journal entry does not provide prompt information about the nature of the transactions.

=> In the journal, the cash transactions are not recorded as these transactions are recorded separately in the cash and bank book so the journal provides less information about the cash and bank balances or even no information about the cash and bank balances. It is argued that such transactions related to the bank and cash shall be recorded in the journal but this is the limitation of the journal in which we cannot record the cash and bank transactions and record them separately in the cash and bank book.