Journal entry: what it is and how to record one easily

Published Friday 6 February 2026

Table of contents

• What is a journal entry?
• Why journal entries matter for your business
• How journal entries work
• What are the different types of journal entries in accounting?
• Journal entry example
• When to use journal entries
• How to record journal entries
• Manage journal entries effortlessly with Xero
• FAQs on journal entries

Key takeaways

• Record every business transaction using double-entry bookkeeping where debits must always equal credits, ensuring one account increases while another decreases by the same amount to maintain balanced financial records.
• Use the appropriate journal entry type for each situation: simple entries for basic transactions, compound entries for complex transactions affecting multiple accounts, and adjusting entries at period-end to ensure accurate financial statements.
• Follow a systematic five-step process when recording entries: identify affected accounts, classify as debits or credits, record the date and description, enter amounts ensuring they balance, then post to your general ledger for review.
• Create correcting journal entries to fix any mistakes rather than deleting original entries, maintaining a clear audit trail that shows errors were identified and properly addressed.

What is a journal entry?

Every financial transaction in your business needs proper documentation in your accounting system.

A journal entry is a record of a business transaction in your accounting system. It captures the amounts debited and credited, the date, and which accounts are affected.

In double-entry bookkeeping, every transaction requires at least two entries: one debit and one credit. These entries form the foundation of your general ledger and ensure your financial statements are accurate.

Journal entries are essential for:

• maintaining a valid balance sheet
• reporting business finances correctly
• tracking where money flows in and out of your business

Why journal entries matter for your business

Journal entries are the foundation of accurate financial records. Without them, you can't produce reliable financial statements or make informed business decisions.

Here's why journal entries matter:

• Accurate financial statements: Journal entries feed directly into your profit and loss statement, balance sheet, and cash flow reports
• Tax compliance: Proper records make tax time easier and help you avoid penalties
• Audit trail: Journal entries create a clear history of every transaction. This principle is upheld by oversight bodies like the Financial Accounting Standards Board (FASB), established in 1973, and is essential for audits and due diligence
• Business insights: Accurate books help you understand where money is coming from and where it's going

If your journal entries are wrong, your financial statements will be wrong too. Taking time to record entries correctly pays off when you need to make decisions, apply for funding, or file your taxes.

How journal entries work

Journal entries track changes to your account balances. Each transaction is recorded as either a debit or a credit, and in double-entry bookkeeping, every transaction needs at least one of each.

Debits and credits can feel counterintuitive at first. Here's the key: they work in opposite directions depending on the account type.

The example below shows what happens when debits and credits are made:

Here's how debits and credits affect different account types:

• Debits increase expense and asset accounts, and decrease liability, revenue, and equity accounts
• Credits decrease expense and asset accounts, and increase liability, revenue, and equity accounts

The golden rule: Debits must always equal credits. A $100 debit requires a $100 credit in the same journal entry to keep your books balanced.

Your bookkeeper or accountant can explain this further. This directory can help find an accountant near you.

What are the different types of journal entries in accounting?

The type of journal entry you use depends on the transaction you're recording. While some sources list five common types, there are actually seven main categories you should know. Specific practices vary based on the accounting framework used, such as the International Financial Reporting Standards (IFRS), which are followed by almost 110 countries.

Here are the most common types of journal entries in accounting, with explanations of when to use each one.

Simple journal entry

A simple journal entry affects exactly two accounts: one debit and one credit. When one account increases, the other decreases by the same amount.

Use simple journal entries for straightforward transactions, like cash purchases or basic sales.

Compound journal entry

A compound journal entry involves multiple debits and credits across more than two accounts. Use it when a single transaction affects several accounts at once.

Payroll is a common example. One payroll entry might include:

• Wage expenses (debit)
• Payable income taxes (credit)
• Superannuation payable (credit)
• Cash or bank account (credit)

The totals must still balance: all debits equal all credits.

Adjusting journal entry

An adjusting journal entry updates account balances at the end of an accounting period to ensure your financial statements are accurate.

Use adjusting entries to:

• record income or expenses that span multiple periods
• account for accruals and deferrals
• capture estimated expenses

For example, if a construction company works for three months but invoices only when the job is complete, they'd record an adjusting entry each month for one-third of the expected revenue.

Reversing journal entry

A reversing journal entry undoes an entry from a previous period to simplify future recording. It's typically made at the start of a new accounting period.

For example, if you accrued wages in December for work done but not yet paid, you'd reverse that entry in January when the actual payment is processed. This prevents double-counting the expense.

Recurring journal entry

A recurring journal entry records transactions that happen on a regular schedule, like monthly rent, insurance premiums, or subscription fees.

Many accounting software tools let you automate recurring entries, saving time on repetitive tasks.

Closing journal entry

A closing journal entry is the final entry at the end of an accounting period. It transfers balances from temporary accounts (revenue and expenses) to permanent accounts (like retained earnings).

Closing entries reset your revenue and expense accounts to zero, so you start the next period with a clean slate.

Correcting journal entry

A correcting journal entry fixes errors in previous entries. Use it when you've posted an amount to the wrong account or recorded an incorrect figure.

The correcting entry shows the error was identified and moved to the correct account, keeping your audit trail clear.

Journal entry example

Here's a simple journal entry example.

Scenario: The Cosy Cake Shop buys baking supplies for $300 cash on 20 January 2021.

What happens:

• Baking supplies account increases (debit $300)
• Cash account decreases (credit $300)

Here's what the journal entry looks like:

When to use journal entries

You'll use journal entries whenever you need to record a financial transaction in your books. Some entries happen automatically through your accounting software, while others require manual input.

You'll encounter several common situations that require journal entries in your day-to-day accounting. Here are the most frequent scenarios:

• Recording sales and purchases: Track revenue and expenses as they occur
• Making adjustments: Update accounts at the end of a period for accruals, deferrals, or estimates
• Correcting errors: Fix mistakes in previous entries
• Recording non-cash transactions: Capture depreciation, bad debt write-offs, or asset revaluations
• Closing the books: Transfer temporary account balances at year-end

If you use accounting software like Xero, the software automatically creates many routine journal entries when you invoice customers or record bills. You'll typically create manual entries for adjustments, corrections, and transactions outside your normal workflow.

How to record journal entries

Recording journal entries accurately keeps your books balanced and your financial reports reliable. Follow these steps to record a journal entry correctly:

1. Identify the transaction and accounts involved: Choose the transaction you want to record and identify which accounts it affects. Common accounts include cash, revenue, expenses, and assets. Ask yourself which account will gain and which will lose from this transaction.
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 organised.
4. Enter debit and credit amounts: Enter the amounts in your debit and credit columns. Always verify that total debits equal total credits before moving on.
5. Post to your general ledger and review: Post the balanced entries to your general ledger. Run a final check to confirm your ledger accounts are accurate. If you spot an error later, use a correcting journal entry to fix it.

Manage journal entries effortlessly with Xero

Automate your journal entries with Xero, reducing manual data entry and the risk of errors. Your journals are stored securely in one place, and you can generate financial statements whenever you need them.

Spend less time on bookkeeping and more time running your business. Get one month free and see how Xero simplifies your accounting.

FAQs on journal entries

Here are answers to common questions about journal entries.

What are the three rules of journal entry?

Three fundamental rules guide how you record journal entries:

• Debit the receiver, credit the giver (for personal accounts)
• Debit what comes in, credit what goes out (for real accounts)
• Debit expenses and losses, credit income and gains (for nominal accounts)

These rules help you determine which accounts to debit and credit for any transaction.

What happens if I make a mistake in a journal entry?

You can easily fix any errors in your journal entries. Create a correcting journal entry to reverse the error and record the correct amounts. Keep the original entry to maintain a clear audit trail. Accounting software like Xero makes it easy to track and correct errors without disrupting your records.

Do I need to make journal entries if I use accounting software?

Yes, but accounting software handles most of the work for you. When you record transactions like invoices or payments, the software automatically creates the journal entries behind the scenes. You may still need to create manual journal entries for adjustments, corrections, or transactions that don't fit standard workflows.

How are journal entries different from regular transactions?

A transaction is the business event itself, like making a sale or paying a bill. A journal entry is the accounting record of that transaction. Every transaction you want to track in your books needs a corresponding journal entry that shows the debits and credits involved.

What's an example journal entry?

Here's a simple example:

• Date: 25 October 2026
• Description: Purchased office supplies for cash
• Debit: Office Supplies – $300
• Credit: Cash – $300

The debit increases the expense account, while the credit decreases cash on hand. Total debits equal total credits.