Companies need to construct their financial statements in such a way that they reflect the real accounting situation of the entity, for which accounting entries are used. What are accounting entries and how can we use them to keep our accounts properly?
It is important to know not only what accounting entries are, but also what types exist and how, depending on the type used, we will be able to reflect certain financial transactions, from collections and payments to transfers, invoices received, remittances and invoices issued.
Accounting entries are undoubtedly a very important tool for the proper management of accounting, which is compulsory for all companies. However, they are also crucial for better control of payroll, tax payments, proper sales management or more efficient purchasing management.
What are accounting entries?
An accounting entry is an entry made in the accounting ledger to record the economic movements that take place within a company as a result of its economic activity.
In the double-entry bookkeeping system, each accounting entry must be recorded on both the debit and the credit side. In this way, each accounting transaction that takes place in the enterprise is reflected in the liabilities and assets, respectively, of the entity.
In short, the accounting transaction will be reflected through an entry in the journal, in which two entries will appear in two different accounts.
Type and classification of accounting entries
To properly record all the transactions that take place within the business, it is essential to know the different accounting entries that exist, which are classified according to their function or form.
Depending on the substance or function of the accounting entries, they can be classified into the following types of accounting entries:
- Operating entries: these are the accounting entries that reflect the accounting transactions that take place in the day-to-day operations of the company during a whole year. The operating entries will record, in chronological order, all the transactions that have taken place in the company during its economic activity. This is the case of payments to suppliers, sales or collections from customers.
- Adjustment entries: these are the accounting entries at the close of the financial year, coinciding with the presentation of the company’s balance sheet. Their purpose is to reflect a true and fair view of the company’s accounts at the end of the financial year. This is the case for depreciation, provisions and accruals and deferrals.
- Regularisation entries: these accounting entries are used to close and settle the company’s income and expenditure accounts so that the result of this account can be transferred to the result of the financial year.
- Opening entries: this accounting entry is the first entry made at the start of a new financial year.
- Closing entries: this is the last entry made within a financial year. It cancels all accounts that still have a balance and definitively closes the accounts for the financial year.
Although the classification according to the substance or function of accounting entries is the most important, they can also be classified according to their form.
In other words, depending on the form it takes, the accounting entry will identify the number of accounts involved in each transaction, and these are as follows:
- Simple journal entry: these are accounting entries in which only one debit account, liability account and one credit account or asset account are used, both with an identical amount. Thus, one account is debited and another account is credited for an equal amount.
- Double entry: double entries are accounting entries that use two or more debit or credit accounts. In these entries, the sum of the debits and credits must match, so that the accounting entry is perfectly square.
Accounting entries are a basic accounting tool used by companies to keep proper records of their activity. Thanks to them, it is possible to keep the sales and purchases journal up to date and give a true and fair view of the accounting and financial situation of the entity.
However, it is just as important to know how to make an accounting entry as it is to know the different types of accounting entries that exist.
In this way, a company will be able to keep its accounts in order and avoid any problems that may arise from accounting management. This is essential, as entities are obliged to keep their accounts properly and by the law.
Please contact our tax advisors in Barcelona regarding this issue.