What is a journal entry and when do I need to use one?

Journal Entry

[simple_tooltip content=’A journal entry, in accounting, is the logging of a transaction in an accounting journal that shows a company debit and credit balances.’]Journal entries[/simple_tooltip] are used to record a law firm’s business transactions onto its books.^[1] The term journal entry comes from the times before computers existed, when businesses recorded their business transactions in a hardbound book called a journal. Each page in the journal was assigned to a different [simple_tooltip content=’A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Each account is a unique record summarizing each type of asset, liability, equity, revenue and expense.’]general ledger[/simple_tooltip] account, and every journal entry contained at least one debit and one credit and affected at least two accounts – a process known as [simple_tooltip content=’Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account.’]double-entry bookkeeping[/simple_tooltip].^[1]^[2]

Computerized accounting programs (legal or general) automate journal entries for routine business transactions such as payments from clients, payments to vendors, or deposits to bank accounts.^[2] For this reason, law firms should not use general journal entries to enter everyday transactions into their accounting program.^[1]^[2] Instead, firms should only make the following types of journal entries: [simple_tooltip content=’The purpose of adjusting entries is to adjust revenues and expenses to the accounting period in which they occurred.’]adjusting entries[/simple_tooltip], [simple_tooltip content=’Reversing entries, or reversing journal entries, are journal entries made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made at the end of the previous accounting period.’]reversing entries[/simple_tooltip], and [simple_tooltip content=’A compound journal entry is an accounting entry in which there is more than one debit, more than one credit, or more than one of both debits and credits.’]compound entries[/simple_tooltip].^[1]

Firms that use the [simple_tooltip content=’Accrual based is a method of recording accounting transactions for revenue when earned and expenses when incurred.’]accrual-based[/simple_tooltip] accounting method, will use adjusting entries to ensure that all earned revenues and all incurred expenses for a specific month appear on the month-end books. Then, when you are ready to record the actual revenue or actual expense amount, you will use a reversing entry to undo the previous month’s adjusting entry.^[2] For example, your end-of-month payroll adjusting entry will be reversed once you know what your actual payroll expenses were for that month.^[1]

Law firms that use the [simple_tooltip content=’The cash based is a method of recording accounting transactions for revenue and expenses only when the corresponding cash is received or payments are made.’]cash-based[/simple_tooltip] accounting method generally don’t need to make adjusting or reversing entries. They may, however, need to make compound entries – entries which affect more than two general ledger accounts.^[3] For example, payroll transactions can affect three or more accounts – the salary expense account, the payroll tax expense account, and the cash asset account.^[3] So you will need to use a compound entry in order to record the payroll transactions into the three affected general ledger accounts.