When you need to transfer money from one account to another you will need to make a journal entry and adjust the ledgers as required. There are many different accounts in the profit and loss balance sheet and there could be many different reasons why and adjustment needs to be made.
If you are using accounting software it will create a double entry which debits the bank account and credits whatever account the money is going to. Every transaction that gets created will end up with two entries to the accounts.
A journal will need to be produced if an adjustment is needed to the accounts for reasons such as bad debt, accruals, prepayments, overpayments or items posted to the wrong code.
For a journal entry format details will be needed in relation to the account code, date of transaction, journal number and the credit or debit amount. This will be entered in a form which creates a record of the transactions. The journal entries will be equal with the amount being shown moving from one account to another.
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During the year you would buy insurance for 12 months at a possible rate of £300 but if it is purchased in June, only six months of the insurance fee will relate to the current year. A prepayment of 6 months will need to be entered into the journal in order to correct the figures for the year.
The original insurance entry to the accounts would have looked like this:
The journal form would look like this.
Prepayment Journal entry example
Accruals are defined as adjustments which are made for either a sale that no sales invoice has been issued, or for expenses that an invoice was not sent from the supplier. These adjustments will need to be made to ensure that the final accounts show the correct figures for the whole year.
Examples of accruals journals are
- a) Sales which were made during the month but a sales invoice of £2000 has not been issued, a journal is required to correct the accounts.
- b) Goods to the value of £80 have been received and sold to a customer (cost of sale), at the period end the purchase invoice has not been received.
Cost of Sales
In the above examples for both accruals and prepayment and, when the invoice is received and posted to the ledgers there will be duplicate figures in the accounts. You will be required to reverse the journal. If you are using software, most software packages will allow you to enter a specific date to reverse a journal.