Journal entries in accounting: what they are and how to record them

Published Tuesday 18 November 2025

Table of contents

• What is a journal entry?
• How journal entries work
• When to use journal entries
• What are the different types of journal entries in accounting?
• Journal entry example
• How to record journal entries
• Streamline your journal entries with Xero
• Frequently asked questions about journal entries

Key takeaways

• Record every business transaction using the debit and credit system where debits increase asset and expense accounts while credits increase liability, revenue, and equity accounts, ensuring total debits always equal total credits in each entry.

• Utilize different journal entry types strategically, including simple entries for straightforward transactions, compound entries for complex multi-account transactions, and adjusting entries at period-end to ensure accurate financial statements.

• Follow a systematic five-step process for recording entries: identify the transaction and affected accounts, classify each as debit or credit, record the date and details, enter amounts in correct columns, and post to the general ledger after verifying balance.

• Implement correcting journal entries to fix errors without altering historical records, maintaining a clear audit trail while ensuring your financial statements remain accurate and compliant with accounting standards.

What is a journal entry?

A journal entry is a detailed record that tracks every business transaction using debits and credits. It captures essential data like transaction amounts, dates, and affected accounts to maintain accurate financial records.

Journal entries are the foundation of your accounting system. They feed directly into your general ledger. This ensures your financial statements, including your balance sheet, reflect your business performance.

Here's more on FASB accounting standards.

How journal entries work

Journal entries track changes in your account balances using a system of debits and credits. Every transaction needs at least two entries that balance each other.

How the debit and credit system works:

• Debits increase: asset and expense accounts
• Credits increase: liability, revenue, and equity accounts
• Balance requirement: total debits must equal total credits in every entry

This example shows how debits and credits affect your accounts:

The debit and credit system follows consistent rules across all account types:

Debits increase:

• Asset accounts (cash, inventory, equipment)
• Expense accounts (rent, utilities, supplies)

Credits increase:

• Liability accounts (loans, accounts payable)
• Revenue accounts (sales, service income)
• Equity accounts (owner's capital, retained earnings)

Every journal entry must have equal debit and credit amounts.

If you need help, you can find an accountant near you.

When to use journal entries

Journal entries are the building blocks of your financial records. You'll use them to record any event that affects your business's finances. You record every financial move your business makes with a journal entry.

Common situations that require a journal entry include:

• Making a cash sale to a customer
• Purchasing inventory or supplies on credit
• Paying employee wages
• Receiving a loan from the bank
• Making adjustments at the end of an accounting period

What are the different types of journal entries in accounting?

There are seven main types of journal entries. Each type has a specific purpose in your accounting.

Simple journal entry

A simple journal entry involves exactly two accounts: one debit and one credit for the same amount.

Simple entries work best for straightforward transactions such as cash purchases, bill payments, or single-item sales where only two accounts are affected.

Compound journal entry

A compound journal entry involves multiple debits and credits across more than two accounts. It captures all aspects of complex transactions in a single entry.

Common uses for compound entries:

• Payroll processing (wages, taxes, deductions)
• Inventory purchases with multiple payment methods
• Sales transactions with discounts and taxes

Balance requirement: All debits must still equal all credits, regardless of how many accounts are involved.

Adjusting journal entry

You make an adjusting journal entry to update account balances before you prepare financial statements at the end of an accounting period. This ensures your statements include the correct information for official filings. For public companies, the Securities and Exchange Commission (SEC) sets specific due dates for annual reports, such as Form 10-K, that vary based on the company's size.

You make an adjusting journal entry to record income or expenses that might have been missed, such as a transaction that started in one financial period but ended in another.

Adjusting entries are commonly used to account 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, it needs to include an adjusting journal entry each month for one third of the revenue.

Reversing journal entry

Make a reversing entry to correct journal entries from the previous period and simplify future transactions.

For example, you may need to reverse an accrual of wages for work done in a previous month but paid in the current month. You account for these wages in the first month, even though they have not been paid yet, and then reverse the journal entry in the next month.

Recurring journal entry

Regular, repeated transactions, such as monthly rent or bills, trigger recurring journal entries.

Closing journal entry

A closing journal entry is the final entry to close an accounting period. Use it to transfer balances from temporary accounts, such as revenue and expense accounts, to permanent accounts, such as retained earnings. This prepares your accounts for the next fiscal period.

Correcting journal entry

A correcting journal entry fixes errors in your journal entries to simplify your bookkeeping. Correcting errors helps you avoid delays in financial reporting. The Securities and Exchange Commission (SEC) allows for filing extensions on periodic reports if they cannot be completed on time without unreasonable effort or expense. Use a correcting journal entry for simple errors, such as recording a journal entry in the wrong account. Enter a correcting journal entry to show the amount was moved to the correct account.

Journal entry example

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

Here's what the simple journal entry looks like:

How to record journal entries

Recording journal entries correctly keeps your financial records accurate and helps you avoid costly errors. Follow these steps for every transaction:

Identify the transaction and accounts involved

Identify the transaction and affected accounts by asking: 'What did you receive?' and 'What did you give up?'

Examples:

• Cash purchase: Gain supplies (asset), lose cash (asset)
• Credit sale: Gain accounts receivable (asset), gain revenue
• Loan payment: Lose cash (asset), reduce loan balance (liability)

Classify the transaction as a debit or credit

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

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 organized.

Enter debit and credit amounts

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

Post to your general ledger and review

After you check that your debit and credit entries are equal, post them to your general ledger. Run a final check to make sure the amounts balance and your ledger accounts are accurate.

You may need an extra step if you need to correct an incorrect journal entry.

Streamline your journal entries with Xero

Xero accounting software simplifies journal entry management by automating routine entries and ensuring accuracy across your financial records.

Key benefits:

• Automated entries: Reduce manual work and prevent errors
• Secure storage: Keep all journal records organized and accessible
• Real-time reporting: Generate financial statements instantly to track business performance

Ready to streamline your accounting? Get one month free and see how Xero accounting software can help you manage your bookkeeping.

Frequently asked questions about journal entries

What are the five types of journal entries?

To fill out a journal entry correctly:

1. Record the transaction date and assign a tracking number
2. Enter account names and brief descriptions
3. Input debit and credit amounts in the correct columns
4. Verify that debits equal credits before finalizing

Pro tip: Xero accounting software automatically checks your work and prevents common entry errors, saving you time and improving accuracy.

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

A simple journal entry affects only two accounts – one debit and one credit. A compound journal entry is used for more complex transactions and involves more than two accounts, such as a payroll entry with multiple deductions.

How often should I make journal entries?

You should record a journal entry every time a business transaction occurs. Consistent, timely entries keep your financial records accurate and up to date, which is crucial for making informed business decisions. For official purposes, such as a prospectus, the Securities and Exchange Commission (SEC) requires that financial statements must be relatively recent, in some cases not more than sixteen months old.

What happens if I make an error in a journal entry?

If you find an error, fix it with a correcting journal entry. This entry reverses the incorrect one and records the transaction correctly. This keeps a clear audit trail without changing past records.

Can Xero automatically create journal entries for me?

Yes, Xero accounting software automates many journal entries for you. When you create an invoice, record a bill, or reconcile a bank transaction, Xero handles the corresponding journal entries in the background. This saves you time and reduces manual errors.