Journal entries in accounting: How to record and track

Published Friday 7 November 2025

Table of contents

• What is a journal entry?
• Why are journal entries important?
• What are debits and credits?
• How journal entries work
• What are the different types of journal entries in accounting?
• Journal entry example
• How to record journal entries
• Master accounting basics with Xero
• Frequently asked questions about journal entries

Key takeaways

• Apply the fundamental rule that every journal entry must have equal debits and credits to maintain balanced books and prevent accounting errors.

• Record journal entries systematically by identifying the accounts involved, classifying each as a debit or credit, entering the date and description, and posting to your general ledger for accurate financial tracking.

• Utilise different types of journal entries for specific business needs, such as simple entries for basic transactions, compound entries for complex transactions affecting multiple accounts, and adjusting entries to correct accounts before preparing financial statements.

• Implement automated accounting software to streamline journal entry creation, reduce manual errors, and ensure compliance with financial reporting requirements while maintaining secure records.

What is a journal entry?

A journal entry is a detailed record of a business transaction that tracks money moving between accounts. Each entry shows exactly what happened, when it happened, and which accounts were affected.

Journal entries serve as the foundation of your financial records. They ensure your books balance correctly and provide the accurate data needed for financial statements like your balance sheet.

Here’s more on preparing financial statements.

Why are journal entries important?

Journal entries help you:

• keep accurate records so every transaction is captured and your financial statements are reliable
• create a clear audit trail for tax time and to answer questions from your accountant or the Australian Taxation Office (ATO)
• make informed decisions by seeing your finances clearly and planning for the future

What are debits and credits?

Debits and credits are the two sides of every accounting transaction. Each transaction must have equal debits and credits.

How debits work:

• Increase: Asset accounts (like cash, inventory)
• Increase: Expense accounts (like rent, supplies)
• Decrease: Liability, revenue, and equity accounts

How credits work:

• Increase: Liability, revenue, and equity accounts
• Decrease: Asset and expense accounts

The golden rule: Every debit must have an equal credit. For example, a $100 debit always requires a $100 credit.

How journal entries work

Journal entries work by recording every transaction twice – once as a debit and once as a credit. This ensures your books always balance.

Here’s how the system works:

• Every transaction affects at least two accounts – money moves from one place to another
• Debits and credits must equal each other – if you debit £100, you must credit £100
• prevents errors by requiring balanced entries

The example below shows what happens when you enter debits and credits:

Your bookkeeper or accountant can explain this further.

What are the different types of journal entries in accounting?

You use different types of journal entries for different transactions. Here are the most common types.

Simple journal entry

A simple journal entry affects only two accounts: a debit and a credit, which correspond to each other – when one account goes up, the other goes down by the same amount. This type of journal entry records simple transactions, such as cash purchases, that affect only two accounts.

Compound journal entry

A compound journal entry records one business event that affects more than two accounts. This organises related transactions in a single entry.

When you’d use compound entries:

• Payroll: Wages, taxes, and deductions all in one entry
• Sales with multiple components: Product sales, shipping, taxes
• Asset purchases: Equipment cost, delivery fees, setup charges

The key rule remains the same – total debits must equal total credits, even when multiple accounts are involved.

Adjusting journal entry

Adjusting journal entries correct your accounts before you prepare financial statements. These entries are a key part of accrual accounting – a topic with a weighting of 10% on the CPA Foundations of Accounting exam – and ensure your reports show the complete financial picture for the period.

Common adjusting entries include:

• Accrued expenses: Bills you owe but haven’t received yet
• Prepaid expenses: Services paid for but not yet used
• Deferred revenue: Money received for work not yet completed
• Depreciation: Spreading equipment costs over time

Example: A construction company working on a three-month project would record one-third of the revenue each month, even though they only invoice at completion.

Reversing journal entry

You might make a reversing entry to correct journal entries you recorded in the previous period and to simplify future transactions.

For example, you might need to reverse an accrual of wages for employees’ pay. This accounts for work done in a previous month that you pay in the current month. You record the wages in the first month, then reverse the journal entry in the next month.

Recurring journal entry

You use recurring journal entries for regular transactions, such as monthly rent or bills.

Closing journal entry

You use a closing journal entry to transfer balances from temporary accounts, such as revenue and expense accounts, to permanent accounts, such as retained earnings. This closes your revenue and expense accounts so you are ready for the next financial period.

Correcting journal entry

A correcting journal entry fixes errors in your journal entries to simplify your bookkeeping later. This process is part of a wider system of financial management; in fact, 'Internal control and reconciliations' has a weighting of 15% on the CPA Australia Foundations of Accounting exam, highlighting its importance.

You use this for simple errors, such as recording a journal entry in the wrong account – you enter a correcting journal entry to show the amount was misposted and moved to the correct account.

Journal entry example

The Cosy Cake Shop bought baking supplies worth $300 on 20 January 2021. The bookkeeper increases the baking supplies account and decreases the cash account. This simple journal entry shows an increase in baking supplies and a decrease in cash for the same amount.

Here’s what the simple journal entry looks like:

How to record journal entries

Record journal entries correctly to keep accurate financial records and avoid costly mistakes. Follow these steps for every transaction:

1. Identify the transaction and accounts involved

Identify the accounts involved by asking: "What did you receive?" and "What did you give up?"

Examples:

• Office supplies purchase: Cash decreases, Office Supplies increases
• Customer payment: Cash increases, Accounts Receivable decreases
• Loan payment: Cash decreases, Loan Payable decreases

2. Classify the transaction as a debit or credit

Decide whether each account will be debited or credited for the transaction.

3. Record the date and transaction details

Enter the transaction date and a brief description, such as 'office supplies purchase'. This keeps your accounting clear and organised.

4. Enter debit and credit amounts

Enter the amounts in your debit and credit columns. Check the total debit amount equals the total credit amount.

5. Post to your general ledger and review

Once you check your debit and credit entries are equal, post them as general ledger entries. Check that the debit and credit amounts balance and your ledger accounts are accurate.

You might need an extra step or two if you made a journal entry incorrectly and need to correct it.

Master accounting basics with Xero

Xero accounting software automates your journal entries, keeps your journals secure, and produces financial statements to help you track your business’s financial health.

Try Xero for free today to get started.

FAQs on journal entries

Here are common questions small business owners might have about journal entries.

How do I fill out a journal entry?

To fill out a journal entry, collect this information:

Required information:

• Transaction date
• Account names (which accounts are affected)
• Amounts (how much for each account)
• Description (brief explanation of the transaction)

Steps to complete:

1. Enter the date and assign a reference number
2. List the accounts and descriptions
3. Record debits and credits in the correct columns
4. Verify totals balance – debits must equal credits

Xero accounting software automates these calculations and prevents manual errors.

Can I use accounting software to track journal entries?

Yes, you can use accounting software to streamline the entire journal entry tracking process, from automating creation to producing precise financial reports.

This helps you meet compliance deadlines, as the Australian Securities and Investments Commission (ASIC) requires most companies to lodge financial reports within four months after the end of the financial year. This saves you time and gives you confidence in your finances.

What are the 3 rules of journal entries?

The 'three golden rules' are a traditional way to remember the principles of debits and credits:

1. debit the receiver, credit the giver
2. debit what comes in, credit what goes out
3. debit all expenses and losses, credit all incomes and gains

What’s the difference between simple and compound journal entries?

A simple journal entry is the most basic type, affecting only two accounts – one debit and one credit. For example, buying office supplies with cash. A compound journal entry is used for more complex transactions that affect more than two accounts. A common example is payroll, which involves debiting wage expenses while crediting multiple accounts for cash, tax payable, and other deductions.