The Fundamentals of Journal Entries For DTC (with Examples!)

Rayla Rappaport

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Considered the bedrock of sound financial management, journal entries are vital for financial consistency, accurate reporting, and sound business decisions

Accounting journal entries are the cornerstone of financial bookkeeping. Recording all business transactions chronologically, they allow companies to monitor financial activities and make sure their accounts are always balanced.

Understanding the principles of journal entries is crucial, especially for DTC ecommerce operators without much accounting knowledge. It establishes the groundwork for clear financial records, enables precise analysis, and helps ecommerce businesses maintain fiscal health.

This blog post will break down the fundamentals of journal entries – their function, elements, and creation process – while providing ecommerce-specific examples that DTC founders can draw from.

What's in this article?

What Is a Journal Entry in Accounting?
What Are Debits and Credits?
What Is the Purpose of A Journal Entry?
What Does a Journal Entry Include?
How to Write a Journal Entry?
Types of Journal Entries
How Do I Create Journal Entries for My Ecommerce Business?
Examples of Common Journals in Accounting
How to Monitor Journal Entries
Examples of Journal Entries
Mastering Journal Entries for Ecommerce Success
FAQs

‍What Is a Journal Entry in Accounting?

Journal entries guarantee that every financial transaction a business makes is documented. An accounting journal entry refers to the recording of transactions into accounting ledger items. These records provide a thorough chronological log, detailing the transaction date, affected accounts, amounts, and a short explanation.

Every entry consists of a left side (debit) and a right side (credit) to preserve the balance of the accounting equation:

Assets = Liabilities + Equity

Here’s a classic ecommerce example:

When a brand takes a $3,000 cash advance from a financing solution, the journal entry will look like this:

Debit: cash $3,000

Credit: loans payable $3,000

‍What Are Debits and Credits?

Debits and credits are the concepts that govern the structure of journal entries. Debits point to an increase in assets or expenses and a decrease in liabilities or equity. Credits, on the other hand, display an increase in liabilities or equity and a decrease in assets or expenses.

Every journal entry must contain at least one debit and credit entry, maintaining the balance of the accounting equation. And every DTC ecommerce founder should hammer the terminologies into their heads until writing a journal entry feels like second nature:

Debit:

Increases an asset or expense account.

Reduces a liability or equity account.

Credit:

Increases a liability or equity account.

Reduces an asset or expense account.

‍What Is the Purpose of A Journal Entry?

Journal entries are vital for financial consistency and accurate reporting.They are mainly used for:

Documenting transactions: each financial event is recorded to make sure no transaction falls through the cracks.

Monitoring activities: journal entries offer a chronological record of all business transactions, making it easier to track financial activity.

Enabling audit trails: going through a business’s journal entries allows auditors to trace any inconsistencies or anomalies to their source and maintain financial integrity.

Financial statements: methodically logging every financial transaction, journal entries, play a crucial role in creating profit and loss (P&L) statements, balance sheets, and cash flow statements.

‍What Does a Journal Entry Include?

An accounting journal entry is comprised of the following elements:

Transaction date (providing a chronological record of all financial activities)

Account names/numbers (to help determine which accounts are affected by the transaction)

Debit and credit amounts (expressing the transaction’s value and upholding the balance of the accounting equation)

Description (a few details regarding the transaction's background and reason)

Here's an example of a classic ecommerce journal entry following a purchase of $5,000 worth of inventory:

Date: (transaction's date)
Debit: inventory $5,000
Credit: cash $5,000
Description: to record the purchase of $5,000 worth of inventory.

This entry balances the increase in inventory (an asset, therefore debited) with a reduction in cash (another asset, hence credited) of an equal amount, keeping the accounting equation intact.

‍How to Write a Journal Entry?

Writing a journal entry is a relatively simple process. Here's a basic manual:

1. Detect and verify your business’s financial transactions.

2. Identify the accounts impacted and decide whether to debit or credit them.

3. Document the entry in the journal, following the debit and credit system.

As a reminder, every entry should include:

The transaction date.

The accounts impacted (names/numbers)

The amount to be debited and credited.

A short description

Types of Journal Entries

There are various kinds of journal entries in accounting. For instance, an ecommerce business might need to record recurring payments for essential tools, such as a monthly subscription to an inventory management software.

Below is a list of journal entry types that are used by most businesses:

Opening entries: made at the beginning of an accounting period to record the balances from the previous period. These entries establish the starting point for the new accounting period and ensure that all previous financial data is accurately carried forward.

Transfer entries: used to move or re-allocate amounts from one account to another. These entries ensure accurate reporting by reflecting changes in account balances without affecting the overall financial position.

Closing entries: made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues and expenses) to permanent accounts. Closing entries "close" the temporary accounts so they are ready for the next period's transactions.

Adjusting entries: made at the end of an accounting period to update the balances of certain accounts before the financial statements are prepared.

Compound entries: these types of entries involve more than two accounts, where multiple debits and credits are recorded in a single transaction.

Reversing entries: made at the beginning of a new accounting period to reverse certain adjusting entries from the end of the previous period.

‍How Do I Create Journal Entries for My Ecommerce Business?

To start creating journal entries for your brand, follow these steps:

Collect and verify all the relevant documents – e.g., invoices and receipts – about your financial transactions.

Identify the impacted accounts and the corresponding amounts for the transactions.

Ensure that the accounting equation – Assets = Liabilities + Equity – holds for each transaction.

Determine which account to debit and which to credit.

Record the transaction in the accounting journal and include all pertinent information.

Regularly check the journal entries to make sure that financial recording is accurate and consistent.

Examples of Common Journals in Accounting

General Journal:

Also referred to as the book of original entries, the general journal is the first place where all transactions are recorded. By documenting all financial activities chronologically, the general journal forms a detailed account of a business's transactions.

Special Journal:

Special journals are designed to simplify the entry process by organizing similar transactions and recording them within a given category. Grouping similar transactions in designated journals helps maintain structured record-keeping.

Notable special journals include:

Sales journal (documents all credit sales transactions)

Purchase Journal (documents all credit purchase transactions)

Cash receipts journal (records all cash inflows)

Cash payments journal (records all cash outflows)

How to Monitor Journal Entries

Crucial to ensuring financial data precision and dependability, monitoring journal entries is something every brand owner should do. Here are a few approaches:

Use accounting software that enables simple data input, transaction sorting, monitoring, and reporting.

Make sure that each journal entry is assigned a distinct reference number to help with fast retrieval and verification.

Keep detailed records for every transaction to verify the related journal entries.

Perform regular internal audits to carefully review that all transactions were correctly entered and sorted.

Examples of Journal Entries

Payment for marketing services:

Date: (transaction's date)
Debit: marketing expense $2,000
Credit: cash $2,000
Description: payment for monthly digital marketing services.

Recording customer refunds:

Date: (transaction's date)

Debit: sales returns and allowances $500

Credit: cash $500

Description: refund issued to a customer for a returned product.

Subscription Software Payment

Date: (transaction's date)

Debit: software expense $200

Credit: cash $200

Description: Monthly payment for ecommerce platform subscription.

Mastering Journal Entries for Ecommerce Success

Journal entries form the bedrock of sound financial management for any business, including ecommerce ventures. By meticulously recording every financial transaction, from inventory purchases to sales and operating expenses, journal entries provide a clear and comprehensive picture of a company's fiscal health.

For ecommerce businesses in particular, mastering the art of journal entries is crucial. The nature of online retail often means a high volume of transactions, various payment methods, and complex inventory management. Proper journal entries help track these multifaceted operations, offering insights into cash flow, profitability, and overall financial performance.

As the digital marketplace continues to evolve and competition intensifies, having a firm grasp on financial data becomes increasingly vital. By maintaining accurate and detailed journal entries, ecommerce businesses can navigate the complexities of online retail with confidence, make data-driven decisions, and position themselves for long-term success.

FAQs

What is an example of a journal entry?

Here's a journal entry of an inventory purchase in the amount of $5,000:

Date: (transaction's date)

Debit: inventory $5,000

Credit: cash $5,000

Description: to record the purchase of $5,000 worth of inventory.

How do you write a journal entry?

To write a journal entry, identify the accounts affected, determine which account to debit and credit, enter the transaction date, amounts, and include a brief description.