What is the primary purpose of including an 'explanation' for each transaction in a journal entry?

• A. To record the monetary value of the transaction
• B. To provide a brief description that clarifies the nature and reason for the transaction
• C. To indicate which accounts are debited and credited
• D. To summarize the company's financial position at year-end

Answer: (B)

Verified step by step guidance

1. Understand the purpose of a journal entry: A journal entry is used to record financial transactions in the accounting system, ensuring that the accounts affected by the transaction are properly updated.
2. Recognize the role of an 'explanation' in a journal entry: The explanation provides a brief description of the transaction, clarifying its nature and purpose for future reference.
3. Differentiate the explanation from other components: While the monetary value, debits, and credits are essential for recording the transaction, the explanation serves as a narrative to support the understanding of why the transaction occurred.
4. Consider the importance of clarity: Including an explanation helps accountants and auditors understand the context of the transaction, especially during reviews or audits.
5. Relate the explanation to the broader accounting process: The explanation does not summarize the company's financial position at year-end but instead provides transaction-specific details that contribute to accurate financial reporting.