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

Journal entries 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 general ledger account, and every journal entry contained at least one debit and one credit and affected at least two accounts – a process known as double-entry bookkeeping.^[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: adjusting entries, reversing entries, and compound entries.^[1]

Firms that use the accrual-based 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 cash-based 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.

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References

1. Journal entry definition
2. What is a journal entry?
3. Compound journal entry