Journal entries, or accounting treatments, refer to the way in which a transaction is recorded and reflected in a company’s information and reports. Within a company, processes have been set up to achieve its objectives. Examples are acquire to retire for the purchase of (in)tangible assets, procure to pay to obtain goods, or order to cash for sales activities. Within these processes, the company engages in a transaction with a third party that needs to be accounted for. Next to financial transactions, this also relates to environmental or social transactions that the company will keep record of and report on.
The objective of the accounting treatment is to ensure that transactions are accurately recorded and reflected in a company’s financial and ESG statements. This involves identifying, measuring, recording and communicating information about a company’s activities to stakeholders
The accounting treatment of a transaction should reflect the underlying economic substance of the transaction and should result in statements that are reliable, relevant and comparable over time. The accounting treatment should also comply with legal and regulatory requirements and be consistent with the company’s accounting policies and procedures.
The primary objective of the accounting treatment is to provide stakeholders with useful information about a company’s performance and positions.
Steps to take
The accounting treatments involve several steps, including identifying the transaction, determining the appropriate account(s) to record the transaction, and determining the timing and method of recognition for the transaction.
- Identify the transaction: The first step is to identify the transaction that has occurred. This could be a purchase, sale, payment, receipt, CO2 emission or other type of activity.
- Determine the accounts involved: Once the transaction has been identified, the next step is to determine the accounts that will be affected by the transaction. This will depend on the nature of the transaction and the type of accounts involved. For example, if a company sells products to a customer, the accounts involved might include accounts receivable, revenue and cost of goods sold.
- Determine the timing of recognition: The next step is to determine the timing of recognition for the transaction. This will depend on the accounting standards and principles that apply to the transaction, as well as the company’s specific accounting policies and procedures. For example, revenue may be recognised at the time of sale (point in time) or it may be recognised over a period of time (over time).
- Determine the method of recognition: Finally, the method of recognition needs to be determined. This refers to the way in which the transaction will be reflected in the company’s financial or ESG statements. This may involve creating journal entries, adjusting existing entries or reclassifying entries to ensure that the financial statements accurately reflect the company’s financial position.
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The Fidugius Accounting & Reporting Manual
A journal entry is a record of a transaction that is recorded in a company’s general ledger. It is the first step in the accounting process and is used to document all transactions that occur within a company, including purchases, sales, payments and receipts.
Each journal entry contains a date, a description of the transaction, and one or more debit and credit entries. The debit and credit entries must always balance, i.e. the total amount debited must equal the total amount credited. This is known as the double-entry bookkeeping system.
Debit entries represent money coming into the business, while credit entries represent money going out of the business. For example, if a business receives cash from a customer, the journal entry would include a debit to the cash account and a credit to the accounts receivable account. If a business pays a supplier for goods, the journal entry would include a debit to the accounts payable account and a credit to the cash account.
Journal entries are important because they provide a detailed record of all transactions that occur within a business. This information is used to prepare financial statements, such as the balance sheet and income statement, which provide an overview of the company’s financial performance. Journal entries also help to ensure that the company’s books are accurate and that all transactions are recorded properly.
Accurate and consistent application of accounting treatments
Ensuring that accounting treatments are applied accurately and consistently is important to maintaining the reliability and accuracy of a company’s financial and ESG statements. Here are some ways to ensure that accounting treatments are applied accurately and consistently:
- Develop and maintain accounting policies and procedures: A company should have clearly defined accounting policies and procedures that are documented and communicated to all employees involved in the accounting process. These policies should be reviewed regularly to ensure they are up-to-date and relevant.
- Provide training and education: Employees involved in the accounting process should receive adequate training and education on the company’s accounting policies and procedures. This helps ensure that everyone understands how to apply the policies consistently and accurately.
- Establish internal controls: A company should establish internal controls that provide reasonable assurance that financial transactions are recorded accurately and consistently. Internal controls may include segregation of duties, review and approval processes, and regular reconciliations.
- Perform regular audits: A company should perform regular audits of its accounting records and financial statements to ensure that accounting treatments are applied accurately and consistently. Audits may be performed internally or by an external auditor.
- Monitor and analyse financial and ESG data: A company should regularly monitor and analyse its financial data to identify any errors or inconsistencies. This helps to ensure that accounting entries are applied accurately and consistently, and that any issues are addressed promptly.
The Fidugius Accounting & Reporting Manual provides all those responsible for posting journal entries with a clear understanding of how to process the transaction or account for a position. Examples, relationships with the definition of an account and the applicable accounting policy are all available, showing what is important and what is relevant.