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Home Business

What Are Journal Entries: A Guide to Automated Journal Entries And Why They Are Necessary

Rahul Shukla by Rahul Shukla
November 6, 2020
in Business, Financial Tech, Tech
Journal Entries
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With the motive to transform and simplify financial accounting processes, the goal is set on modernizing the substantial tasks of organizations that can make functioning a breeze. This isn’t out of the box, since automatically scanning and approving account reconciliations or automation of high-volume transactions brings higher levels of ROI due to saved time and effort. Not only do businesses get access to great efficiency and accuracy in operations, but their accounting professionals benefit from this process as well. Once the employees and company are no longer required to perform redundant manual tasks, accountants have more time to help the organization with strategic insights and analysis. No matter how sophisticated the world of finance and accounting has become, one process is still done manually in many organizations across various scales: journal entries.

While we have to know what the basics of journal entries are and how manual journal entries are conducted in an organization, it is important to recognize that the process now is archaic in terms of the technological advancements that automation of financial processes that exist in 2020.

This blog will talk about journal entries and why switching to automated journal entries is the best move for any organization to achieve greater success, especially post-pandemic considering the remote working integration scenario.

Table of Contents

  • What Are Journal Entries?
  • The 6 Hazards of  Outdated Manual Journal Entry Systems
  • Manual Journal Entry System: Easy Facilitators of Frauds
  • Automation: Solution To Manual Journal Entries and Its Woes
  • Automation of Journal Entries Is a Driving Factor For Growth and Efficiency in Financial Transactions
  • What Do Modernizing Journal Entries Bring To The Table?
  • Signs You Need To Embrace Journal Entry Automation:
  • Some Perks of Automation:
  • Conclusion:

What Are Journal Entries?

The ICAI defines journal entries in accounting as “The art of systematically recording, classifying, and summarising in a significant manner the transactions and events which are, in part at least, of financial character or can be monetarily valued.”

For instance, a manufacturing unit purchases raw materials or sells finished goods. Thereby, they spend money for products they need and earn money by selling finished goods. The outflow and influx of money are considered financial transactions, even with credit periods received or allotted. However, when an order is placed with a supplier for any particular machinery, this does not alter the financial stance of the business. Hence, it is not considered as a financial transaction and is not to be included in the Books of Accounts. Financial transactions are to be recorded in documents known as accounting journals. Later, they can be grouped or summarised. This process of manual accounting leads to different steps of Accounts Compilation. These processes at different levels during the Compilation of Accounts should be done using the basic principles of accounting and finance, which are common throughout all kinds of business organisations be it about production or services.

The journal entry is the backbone of accounting, a holdover from the days when accountants relied on paper ledgers to balance the books. While the concept is straightforward: debit what comes in and credit what goes out as well as balance the debit and credit sides; journal entries are much more difficult to execute accurately in businesses. Unlike the accountants who practiced limited sets of journal entries, today’s accounting professionals are required to deal with thousands of transactions, which is impossible to accomplish with accuracy manually. The volume of work the accounting department is subjected to, mixed with multiple compliances and rules, makes the present journal entry system both complex and time-consuming. 

Every step on the way of following the tradition of manual bookkeeping in a modernized system increases the chances of errors and operational bottlenecks. These bottlenecks, in their wake, can lead to careless or hurried approvals and later backdating. This is a red flag to auditors that the process was inefficient at the best, and at its worst, was riddled with errors. 

The manual journal entry system also interferes with visibility and gives way to little to no real-time transparency, limiting the access of data that the management urgently needs to make sound financial decisions. With delays and possible errors, while recording a huge volume of transactions, the organization not only loses time but wastes precious potential from their accounting and finance professionals that they cannot harness due to mundane tasks.

The 6 Hazards of  Outdated Manual Journal Entry Systems

  1. Workflow limitations and crimps
  2. Increased chances of human error
  3. Little to no real-time availability of data and records
  4. Lack of standardized entries and protocols 
  5. Waste of time and labor when technology allows better processes
  6. Increased risk and probability of fraud 

Manual Journal Entry System: Easy Facilitators of Frauds

For both thieves and embezzlers, journal entries make the perfect conduit for committing and concealing frauds. The disadvantages of the manual journal entry process include long processing durations, lack of visibility, and the lack of standardized processes, which can be advantageous for those who intend to record fake revenues or hide losses. Excessive use of manual journal entries can facilitate window dressing, asset misappropriation, and financial statement fraud. This means that a person can manipulate liabilities and expenses to create fictitious revenues and overvalued assets. Such manipulations and frauds are usually conducted to show the financial stance of a company much better than it is in front of investors and creditors to avoid backlash or to undervalue the profits to avoid payment of debentures and hefty taxes.

Automation: Solution To Manual Journal Entries and Its Woes

Modern journal entry systems through accounting software can  help automate:

  • Entry Creation
  • Simplify The Approval Process
  • Streamline Journal Posting And Tracking
  • Integrating Seamlessly With Other Close Processes Or Platforms Including Account Reconciliation
  • High Volume Transaction Matching, Account Balance, And Activity Fluctuations Analysis

And yet many organizations, while eagerly automating reconciliations, still rely on the risky and inefficient manual journal entry process. The question is, why when there are better options available? 

Automation of Journal Entries Is a Driving Factor For Growth and Efficiency in Financial Transactions

Not every business is aware that journal entry automation is a better alternative that can save them a lot of money. In fact, several traditional businesses show resistance to change, but suffer the most in the long term, since the time they come around and are willing to upgrade their systems, they are several generations behind and now have to pay for automation, complete migration of data from outdated systems into cloud-based systems, and also bear the training costs to teach existing employees how to transition into automation.

There have been so many efforts made to streamline the big functions of the organizations, like reconciliations, but the redundant tasks that consume the most amount of time insidiously do’s receive much attention. Until recently, the technology for automation of journal entries was still considered too advanced and only for multinational corporations or businesses on large scales when it couldn’t be farther from the truth that automation is mandatory for the growth and survival of any business post-pandemic.

Accounting and journal entry automation solutions help organizations to save hundreds of hours every month by streamlining, standardizing, and automating up to 90% of the journal entries a business can come across. 

In a rapidly changing, uncertain business climate, “enough” efficiency remains a dangerous fallacy. Organizations must have real-time financial information to drive real-time decisions, as well as the strategic insight and support of finance and accounting professionals. Both this information and the time to analyze it can only be gained through continually increasing efficiency. 

What Do Modernizing Journal Entries Bring To The Table?

For organizations moving beyond the old record-to-report process to a practice of Continuous Accounting, modernizing the journal process is about more than just increasing efficiency. It’s about mitigating risk, improving decision-making capabilities, and driving the business forward through greater access to real-time data and analysis. For these organizations, modernizing the journal entry process can achieve the following tasks: 

  1. Decreases risk and boost confidence in the integrity of the balance sheet through an increased ability to segregate duties, limit access, standardize workflows, and improve visibility
  2. Saves time and frees accounting professionals to focus on work that matters, such as strategy and analysis.
  3. Streamlines the process of audits by enabling immediate access to real-time data and historical information. 
  4. Reduces the likelihood of fraud through increased controls and improved transparency
  5. Saves an organization lots of money by reducing the requirement for paperwork, printing, and storage space.
  6. Enables the practice of going concerned or Continuous Accounting by automating the processes and workflow

Signs You Need To Embrace Journal Entry Automation:

  1. The average monthly number of journals exceeds 500: If you deal with journals containing a single general ledger (GL) document number with multiple lines and your company already processes large numbers of these documents or is expected to reach the level of 500 on average per month, this is a clear sign that projected benefit from intelligent automation for your company is high and up to 50% of the time you are spending now managing journal entries can be saved.
  1. You keep hard copies of the journals: You print and archive your journals and supporting evidence in binders that are susceptible to wear and tear or lack of storage space.
  1. You have little or no means to validate your journal entries to the general ledger: The accountants of the company are unable to utilize active values from the ERP system’s value sets while posting and they wouldn’t know if the values of the previous month’s Excel file are valid in today’s date. If they find an error in the posting, the accountant will have to find it through Excel or enter it manually.
  1. You post journals to General Ledger manually or by using MS Excel: This is an opportunity to commit potential errors and a very slow method to enter transactions. The interfaces of ERP solutions are not very helpful either. The Excel interface provides a pathway to record data but if there are any validation errors, there is manual work required to fix wrong postings while all file handling processes are manual. If a journal is recurrent, an accountant is required to manually create the same journal every month to upload, which is redundant and inefficient.
  1. There are multiple ERP systems in operation: You use multiple ERP solutions or multiple versions of an ERP solution. This requires you to know by heart in which ERP system what companies work, what the segments are in each such system, and where to send journals when they are ready. This is a tedious process and wastes an insurmountable amount of time that could be saved if you have an automated journaling system.
  1. You are managing your journals through emails: You have very little or no means of keeping track of the journaling process. Emails are being sent back and forth in the team to track the status or to expedite the process. The roles for entry creation, approval, and handling of such journals might be agreed upon, but there is no tangible control of the process or real-time access.

Some Perks of Automation:

Modern journal entry automated solutions can streamline all kinds of journal entries, simplify the process of approval, and facilitate easy entry posting and tracking. However, there are several; businesses eagerly automate their reconciliations while still relying on risky and potentially erroneous manual journal entry processes.

Automation of journal entries can help you reap a lot of rewards as a business on any scale, be it small, medium, or large, including:

  1. Working in a smarter and more efficient manner with automated journal entries and corrections.
  2. Decreasing the risk of errors, and duplicate entries and boosting the confidence of accounting professionals, investors, and members in the integrity of the company’s balance sheet.
  3. Streamlining the process of auditing and compliance by enabling prompt access to real-time data and historical records.

Conclusion:

Understanding the workings of journal entries is important for any accounting professional as it gives them deeper insight into the company’s financial transactions. Since accounting for small businesses is usually commenced on a manual level, it is a good reminder to know that scalability and expansion are inevitable, and hence manual entries are not feasible in the long run. Automation of journal entries helps organizations of several scales and industries stay up to date with the latest technological upgrades, thereby saving time by allowing their accounting department to focus on more important tasks. Our advice is to switch to automated journal entries and automated accounting software will help your organization save costs and time on data transference. Deskera provides one of the best automation software for accounting, HRM, and payroll solutions. To read more about journal entries, visit Deskera’s blogs. 

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