Journal entry in accounting: What it is and how to record one for your small business
Learn how a journal entry keeps your books accurate, saves time, and makes reporting simpler.
Written by Jotika Teli—Certified Public Accountant with 24 years of experience. Read Jotika's full bio
Published Thursday 27 November 2025
Table of contents
Key takeaways
• Record every business transaction using double-entry bookkeeping, ensuring that total debits always equal total credits to maintain accurate financial records and comply with Canadian GAAP and IFRS standards.
• Identify the correct journal entry type for each transaction, using simple entries for basic two-account transactions, compound entries for complex multi-account transactions, and adjusting entries to update account balances at period-end.
• Follow the five-step process for recording journal entries: identify affected accounts, classify as debits or credits, record transaction date and details, enter amounts, and post to your general ledger while verifying all entries balance.
• Utilize accounting software to automate journal entry creation and reduce manual errors, while maintaining supporting documents for six years as required by the Canada Revenue Agency.
What is a journal entry?
A journal entry is a detailed record of every business transaction in your accounting system. It captures the essential data you need: which accounts are affected, how much money moved, and when it happened.
Why journal entries matter: Accurate journal entries help your financial statements and balance sheet show your true business position.
How journal entries work
Journal entries track every change to your account balances using debits and credits. Here's how it works: every transaction affects at least two accounts, and the total debits must equal the total credits.
Debits and credits work differently than you might expect:
- Debits increase: Asset and expense accounts
- Credits increase: Liability, revenue, and equity accounts
- The amounts must balance: Every $100 debit requires a matching $100 credit
The example below shows what happens when debits and credits are made:
Debits and credits must always balance. For example, a $100 debit must equal a $100 credit in every journal entry.
How debits and credits work:
- Debits increase: Expense accounts, asset accounts
- Debits decrease: Liability accounts, revenue accounts, equity accounts
- Credits do the opposite: They increase what debits decrease, and decrease what debits increase
This maintains the accounting equation balance that keeps your books accurate.
What are the different types of journal entries in accounting?
Different transactions require different journal entry types. Understanding which type to use helps you record transactions accurately and maintain clean financial records.
Simple journal entry
Simple journal entries handle straightforward transactions that affect only two accounts. Use these for basic business activities like cash purchases or sales.
Example: When you buy $200 in office supplies with cash, you debit Office Supplies (+$200) and credit Cash (-$200).
Compound journal entry
Compound journal entries handle complex transactions that affect more than two accounts. Use these when one business event impacts multiple parts of your finances.
You use these for payroll, loan payments, or sales with multiple components.
Payroll example: One payroll transaction might include:
- Debit: Wage expense ($3,000)
- Credit: Cash ($2,400), Payroll taxes payable ($400), Benefits payable ($200)
The rule stays the same: Total debits ($3,000) must equal total credits ($3,000).
Adjusting journal entry
You make an adjusting journal entry to update account balances before preparing financial statements at the end of an accounting period, so the statements will include the correct information.
You make an adjusting journal entry to record income or expenses that span more than one financial period.
You often use adjusting entries for estimated expenses, accruals, and deferred revenue. For example, if a construction company works for three months but only invoices when the work is complete, you need to record a portion of the revenue each month. To account for this deferred revenue they'd need to include an adjusting journal entry each month of one third of the revenue it will invoice for.
Reversing journal entry
You make a reversing entry to correct a previous journal entry and make future transactions easier to record.
For example, you might need to reverse an accrual of wages for employees' pay to account for work done in a previous month that is paid in the current month instead. You'll need to account for these wages in the first month, even though they haven't been paid yet, and 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 end an accounting period. This transfers balances from temporary accounts, such as revenue and expenses, to permanent accounts like retained earnings. You may need to keep these records indefinitely for tax purposes.
Correcting journal entry
You use a correcting journal entry to fix errors, such as posting an amount to the wrong account. This helps keep your bookkeeping accurate and simple.
Journal entry example
The Cosy Cake Shop bought baking supplies for $300 on 20 January 2021. You increase the baking supplies account and decrease the cash account by the same amount.
Here's what the simple journal entry looks like:
How to record journal entries
You can record accurate journal entries in five steps.
1. Identify the transaction and accounts involved
Identify which accounts change in your transaction.
Identify what you gained and what you gave up in the transaction.
- Gained: Office supplies, inventory, or services
- Given up: Cash, created a debt, or provided a service
Common account types include cash, accounts receivable, inventory, accounts payable, revenue, and expenses.
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 (like 'office supplies purchase'). This keeps your accounting clear and organized.
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
After you check that your debit and credit entries are equal, post them to your general ledger. The Canada Revenue Agency requires you to keep most supporting documents for six years.
If you make a mistake, add a correcting journal entry.
Streamline your journal entries with Xero
Xero accounting software automates your journal entries, keeps your journals secure, and produces financial statements to help you track your business’ financial health.
FAQs on journal entries
Here are answers to common questions about journal entries.
How do I fill out a journal entry?
To fill out a journal entry, you need:
- Transaction date: When it happened
- Account names: Which accounts are affected
- Amounts: Debit and credit figures
- Description: Brief explanation of the transaction
Manual process: Enter the date, assign a tracking number, list accounts with amounts, and verify debits equal credits.
Easier approach:Accounting software like Xero automates journal entries and prevents calculation errors.
What's an example journal entry?
Date: 25/10/2024
Description: Purchased office supplies for cash
Account: Office Supplies
Debit: $300
Account: Cash
Credit: $300
This example shows a common transaction for small businesses. You spend $300 in cash on office supplies. You debit the office supplies account to increase expenses and credit the cash account to decrease cash on hand.
Can I use accounting software to track journal entries?
Yes, you can use accounting software to track journal entries. It automates journal entry creation, reduces manual errors, and generates financial reports instantly.
Key benefits: You save time each month, reduce mistakes, and get real-time insights into your business finances.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.