Journal Entry

A journal entry is the mechanism by which anything enters the general ledger. It names the accounts affected, states the debit and credit amounts, which must be equal, and carries the date, the period, a description, and a reference to whatever supports it. Transactions processed through a subledger generate entries automatically. Everything else is entered by a person, and that is the population that matters for control purposes.

The common types are worth distinguishing because they carry different risk. Standard entries record routine activity. Recurring entries repeat each period with the same accounts and often the same amount, which makes them easy to keep posting after the underlying facts have changed. Accruals and their reversing entries handle expenses incurred but not yet invoiced and revenue earned but not yet billed. Adjusting entries correct or complete the record at period end. Reclassifications move balances between accounts without changing net income. Top-side entries are made at the consolidation or reporting layer rather than in the underlying ledger, and because they bypass the normal transaction flow they receive the most scrutiny of any category. Closing entries move nominal accounts to retained earnings at year end.

The control model is simple to state and frequently absent in practice. The preparer of an entry should not be the approver. Support should be attached to the entry rather than filed somewhere else. Approval thresholds should reflect risk rather than convenience. The period should be locked once reported so entries cannot be backdated into a closed month. And every entry should be traceable forward to its ledger impact and backward to its source document.

Manual entries are a standing fraud risk, and auditing standards require the auditor to test them specifically rather than sampling them as part of ordinary substantive work. The patterns that draw attention are consistent across engagements: entries posted to seldom-used accounts, round-number amounts, entries just under an approval threshold, postings made at unusual hours or on weekends, entries by users who do not normally post, entries with sparse or generic descriptions, entries recorded on the last day of a period or in the days after it closed, and unusual pairings of accounts that have no ordinary business relationship. None of those is evidence of anything by itself. Each is a reason to look.

At volume, reviewing entries manually stops working. A mid-sized close can generate thousands of manual entries, and a reviewer who examines all of them is not really examining any of them. The productive approach is to score the whole population against the risk patterns above and spend the review time on the exceptions, with the untested majority documented as untested rather than implied to have been checked.

Related terms: Adjusting Journal Entry, General Ledger, Chart of Accounts, Audit Trail

Related skill: Journal entry anomaly scan

Go deeper: Accounting Automation

Scoring an entire journal entry population against risk criteria is exactly the kind of work that does not scale with headcount. Adopt's agents review every entry, rank the exceptions, and leave the reasoning attached to each one. Sign up free.