Accounting Entries (Explained Examples)

Accounting entries, also known as accounting records or journal entries, are the financial events or transactions that are recorded in a company's accounting books. Every time an economic transaction occurs, such as a sale, a purchase, a salary payment or the payment of an invoice, an accounting entry is made to properly record it.

Imagine the accounting entries as the financial journal of a company, where all the movements of money and resources are recorded. Each accounting entry includes relevant information, such as the date of the transaction, a clear description of the transaction, the accounts affected, and the amounts involved. These records are the basis for the generation of financial reports and the analysis of the financial health of a company.

Importance of accounting entries

Accounting entries are essential in financial accounting for several reasons:

• Accurate record of transactions: Accounting entries allow us to keep an accurate and detailed record of all financial transactions that occur in a company. This helps us to have a clear and up-to-date image of the economic situation of the company at all times.
• Regulatory and legal compliance: Accounting entries ensure that a company complies with accounting principles and current legal regulations. They provide the necessary evidence to support the figures and disclosures in financial reports and facilitate external and internal audit.
• Informed Decision Making: Accounting entries provide reliable and timely financial information that is essential for both short- and long-term decision making. Managers and owners can analyze accounting entries to assess the company's financial performance, identify areas for improvement, and make informed strategic decisions.
• Financial analysis and reporting: Accounting entries are the basis for generating financial reports such as the balance sheet, income statement, and cash flow. These reports provide an overview of the financial situation of a company and are used by investors, lenders and other interested parties to evaluate its performance and solidity.

How accounting entries are recorded

Accounting entries are recorded using a standard format called "double entry" or "economic duality." This principle establishes that every economic transaction has at least two parts: an input and an output of money or value. Therefore, each accounting entry must affect at least two accounts in the accounting system.

To better understand how accounting entries are recorded, let's look at a simple example. Suppose a business sells $1,000 worth of products in cash. The accounting record for this transaction would be made as follows:

Date	Account	Has to	To have
01/06/2023	Box	$1,000
Sales revenue	$1,000

In this case, the "Cash" account is debited with $1,000, indicating the inflow of cash as a result of the sale. In turn, the "Sales Income" account is credited with $1,000, representing the income generated by the sale. The sum of the amounts debited and credited in an accounting entry must always be the same, maintaining accounting balance.

It is important to note that the choice of accounts to be debited and credited in an accounting entry depends on the nature of the transaction and the accounting system used by the company. The accounting entries must faithfully reflect the economic reality of the transaction and follow the established accounting policies.

Follow with:

• debtor movement
• creditor movement

Types of accounting entries

There are different types of accounting entries that are used to record different financial events or transactions. Here we are going to explore some of the most common types:

opening seats

These entries are used at the beginning of an accounting period to open accounts and carry beginning balances into the new period. For example, assets, liabilities, and initial capital are recorded.

Example

Suppose a company starts a new accounting period on January 1, 2023, and has the following beginning balances:

• Box: $5,000
• Accounts Receivable: $2,000
• Inventories: $10,000
• Accounts Payable: $3,000
• Equity: $14,000

The opening entry would record these initial balances in the corresponding accounts. Here is an example of how this transaction would be recorded:

Date	Account	Has to	To have
01/01/2023	Box	$5,000
Accounts Receivable	$2,000
inventories	$10,000
Accounts payable	$3,000
Capital	$14,000

In this entry, Cash, Accounts Receivable and Inventories are debited for their respective initial balances. In turn, Accounts Payable and Capital are credited with their respective initial balances.

closing entries

At the end of an accounting period, closing entries are made to transfer the balances of the income and expense accounts to the capital or retained earnings account. This prepares the accounting system for the next period.

Example

Suppose that at the end of the fiscal year, a company needs to close its income and expense accounts to prepare for the new accounting period. Here is an example of a closing entry to transfer the balances of the income and expense accounts to the Retained Earnings account:

Date	Account	Has to	To have
31/12/2023	Sales revenue	$50,000
Operating costs	$30,000
Accumulated results	$30,000	$50,000

In this closing entry, the Operating Expenses account is debited for its balance, and the Sales Income account is credited for its balance. Then, the Retained Earnings account is credited with the total amount of expenses and the balance of income is transferred.

adjusting entries

Adjusting entries are made to correct and update accounting records at the end of an accounting period. These entries are used to recognize accrued income and expenses, record the depreciation of assets, adjust accounts receivable or payable, among others.

Example

Suppose that at the end of the month, a company needs to adjust its Interest Expense account for the interest earned during the period. Here is an example of an adjusting entry:

Date	Account	Has to	To have
31/01/2023	Interest Expenses	$500
Interest Payable	$500

In this adjusting entry, the Interest Expense account is debited for the amount of interest earned. In turn, the Interest Payable account is credited to reflect the obligation to pay such interest.

payroll entries

Payroll entries are used to record wage payments and related deductions, such as taxes, social security, and employee benefits.

Example

Suppose a company pays the salaries of its employees on the last day of each month. Here is an example of a payroll entry to record the payment of wages:

Date	Account	Has to	To have
30/06/2023	Personal expenses	$10,000
Box	$10,000

In this payroll entry, the Personnel Expenses account is debited for the total amount of salaries paid. In turn, the Cash account is credited to reflect the cash outflow.

Purchase and sales entries

These entries are used to record the purchase and sale transactions of goods or services. For example, inventory purchases, sales made, and associated taxes are recorded.

Example

Suppose a business makes a cash purchase of $5,000 worth of inventory. Here is an example of how this transaction would be recorded:

Date	Account	Has to	To have
10/06/2023	inventories	$5,000
Box	$5,000

In this entry, the Inventories account is debited for the amount of the inventory purchase. In turn, the Cash account is credited to reflect the cash outflow for cash payment.

Now, suppose the company sells $2,000 worth of products on credit. Here is an example of how this transaction would be recorded:

Date	Account	Has to	To have
15/06/2023	Accounts Receivable	$2,000
Sales revenue	$2,000

In this entry, the Accounts Receivable account is debited for the amount of the sale on credit. In turn, the Sales Income account is credited to record the income generated by the sale.