Journal Entries

Recording accounting transactions manually

Journal entries are the foundation of double-entry accounting. They allow you to record financial transactions that might not fit into standard categories like invoices or expenses. For a tailoring business, understanding journal entries helps you maintain accurate financial records and make proper accounting adjustments.

Understanding Journal Entries

A journal entry records a financial transaction with at least two accounts: one debited and one credited. This follows the accounting principle that for every transaction, the total debits must equal the total credits.

Debit and Credit Rules

Accounts that INCREASE with a Debit:

  • Assets (cash, inventory, equipment)
  • Expenses (rent, utilities, wages)

Accounts that INCREASE with a Credit:

  • Liabilities (loans, accounts payable)
  • Equity (owner's capital)
  • Revenue (sales, service income)

When to Use Journal Entries

While many transactions are automatically recorded through invoices, expenses, or bank transactions, journal entries are necessary for:

Accounting Adjustments

  • Depreciation of sewing equipment
  • Amortization of prepaid expenses
  • Accrual of unpaid expenses
  • Recording unearned revenue

Error Corrections

  • Fixing miscategorized transactions
  • Correcting amount errors
  • Adjusting inventory discrepancies
  • Reclassifying transactions

Non-Standard Transactions

  • Owner's capital contributions
  • Owner's drawings/withdrawals
  • Asset transfers or disposals
  • Loan payments (principal and interest)

Period-End Adjustments

  • Month-end or year-end closing entries
  • Inventory adjustments
  • Revenue and expense matching
  • Tax accruals

Creating a Journal Entry

Steps to Create a Journal Entry

  1. Go to Finance > Journal Entries
  2. Click "Create Journal Entry"
  3. Enter the date of the transaction
  4. Add a reference number (optional)
  5. Enter a description that explains the purpose of the entry
  6. Add line items:
    • Select the first account
    • Enter the debit amount (if applicable)
    • Enter the credit amount (if applicable)
    • Add a description for the line item
  7. Add additional line items as needed
  8. Ensure the total debits equal the total credits
  9. Attach any supporting documentation (optional)
  10. Click "Save Journal Entry"

Balancing Check

The Finance Module automatically calculates the total debits and credits as you add line items. The entry cannot be saved until the debits and credits are equal (balanced).

Common Journal Entries for Tailoring Businesses

Example 1: Recording Depreciation

AccountDebitCreditDescription
Depreciation ExpenseAED 500.00Monthly depreciation of sewing machines
Accumulated DepreciationAED 500.00Monthly depreciation of sewing machines

Example 2: Owner's Capital Contribution

AccountDebitCreditDescription
Bank AccountAED 10,000.00Owner's additional investment in business
Owner's CapitalAED 10,000.00Owner's additional investment in business

Example 3: Inventory Adjustment

AccountDebitCreditDescription
Inventory Shrinkage ExpenseAED 750.00Adjustment after physical inventory count
Fabric InventoryAED 750.00Adjustment after physical inventory count

Recurring Journal Entries

For journal entries that need to be made regularly (like monthly depreciation), you can set up recurring journal entries:

  1. Go to Finance > Journal Entries
  2. Click "Recurring Journal Entries"
  3. Click "Create Recurring Entry"
  4. Set up the journal entry details
  5. Set the recurrence pattern (monthly, quarterly, etc.)
  6. Set the start date and end date (if applicable)
  7. Click "Save Recurring Entry"

Best Practices for Journal Entries

  • Clear Descriptions: Always include detailed descriptions that explain the purpose of the entry.
  • Supporting Documentation: Attach relevant documents to support the entry.
  • Consistent Dates: Use the actual transaction date, not the date you're creating the entry.
  • Regular Review: Periodically review journal entries to ensure accuracy.
  • Seek Professional Advice: Consult with an accountant for complex entries or year-end adjustments.
  • Audit Trail: Maintain a clear audit trail by numbering entries and keeping them in chronological order.

Real-World Example

"Khalid owns a tailoring business and recently purchased a new industrial sewing machine for AED 15,000. The machine has an estimated useful life of 5 years with no salvage value. At the end of each month, Khalid creates a journal entry to record depreciation. He debits 'Depreciation Expense' for AED 250 (15,000 ÷ 5 years ÷ 12 months) and credits 'Accumulated Depreciation' for the same amount. He includes a description 'Monthly depreciation of industrial sewing machine' and attaches a copy of the original purchase invoice as supporting documentation. To save time, he sets this up as a recurring journal entry that automatically creates the entry on the last day of each month. This ensures his financial statements accurately reflect the decreasing value of the equipment over time."

ExpensesReports