Journal entry in accounting: definition, types, steps

Published Thursday 12 February 2026

Table of contents

• What is a journal entry?
• What is the purpose of journal entries?
• How journal entries work
• What are the different types of journal entries in accounting?
• When to use journal entries
• Journal entry example
• How to record journal entries
• Simplify journal entries with Xero
• FAQs on journal entries

Key takeaways

• Record every business transaction using double-entry bookkeeping where total debits must always equal total credits, ensuring your financial records remain accurate and balanced.
• Use different journal entry types for specific situations: simple entries for straightforward transactions, compound entries for complex multi-account transactions, and adjusting entries to update account balances at period-end.
• Follow a systematic five-step process when recording entries: identify affected accounts, classify as debits or credits, record the date and description, enter amounts, and post to your general ledger while verifying the balance.
• Automate routine journal entries through accounting software to reduce manual errors and save time, while creating manual entries only for adjustments, corrections, or non-standard transactions.

What is a journal entry?

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

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 financial statements, including your balance sheet.

Journal entries help you track where money comes from and where it goes, so you can report your business finances accurately.

What is the purpose of journal entries?

Journal entries create a complete record of every financial transaction in your business. They form the foundation of accurate bookkeeping and reliable financial reporting.

Here's why journal entries matter:

• Accurate financial statements: Journal entries feed directly into your profit and loss statement and balance sheet.
• Tax compliance: Complete records make tax time easier and support you during audits.
• Business insights: Tracking transactions helps you understand cash flow and make informed decisions.
• Error detection: Balanced entries help you spot mistakes before they affect your reports.

Without journal entries, you'd have no reliable way to track where money comes from or where it goes.

How journal entries work

Debits and credits are the two sides of every journal entry. A debit increases asset and expense accounts, while a credit increases liability, revenue, and equity accounts.

In double-entry bookkeeping, every transaction needs at least one debit and one credit. The total debits must always equal the total credits.

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

• Asset accounts: Debits increase the balance; credits decrease it.
• Expense accounts: Debits increase the balance; credits decrease it.
• Liability accounts: Credits increase the balance; debits decrease it.
• Revenue accounts: Credits increase the balance; debits decrease it.
• Equity accounts: Credits increase the balance; debits decrease it.

The total debits must equal the total credits in every journal entry. A £100 debit requires a £100 credit to balance.

If you need help understanding how this applies to your business, an accountant can guide you. Use this directory to 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. The most common types include simple entries, compound entries, adjusting entries, reversing entries, recurring entries, closing entries, and correcting entries.

Here's when to use each one.

Simple journal entry

A simple journal entry records a transaction that affects only two accounts: one debit and one credit. When one account increases, the other decreases by the same amount.

Use simple entries for straightforward transactions like cash purchases or single payments.

Compound journal entry

A compound journal entry records a transaction that affects more than two accounts. It includes multiple debits, multiple credits, or both.

Use compound entries for complex transactions like payroll, which involves wages, taxes, and deductions all at once. The total debits must still equal the total credits.

For example, a payroll entry might debit wage expenses and credit accounts for income tax payable, superannuation payable, and cash.

Adjusting journal entry

An adjusting journal entry updates account balances at the end of an accounting period. It ensures your financial statements reflect income and expenses in the correct period.

Use adjusting entries for:

• Accrued expenses: costs incurred but not yet paid, such as anticipating bad debt. In the first quarter of 2023, the four largest US banks wrote off a combined $3.4 billion in bad consumer loans.
• Accrued revenue: income earned but not yet received
• Deferred revenue: payments received before delivering goods or services
• Prepaid expenses: payments made before receiving goods or services

For example, a construction company that works for three months but invoices at completion would record an adjusting entry each month for one-third of the expected revenue.

Reversing journal entry

A reversing journal entry cancels out an adjusting entry from the previous period. It simplifies recording when a transaction spans two accounting periods.

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

Recurring journal entry

A recurring journal entry records transactions that repeat on a regular schedule, like monthly rent, loan payments, or subscription fees.

Many accounting software tools let you automate recurring entries, saving time and reducing manual errors, a preference shared by 66% of accounting teams who now favour automating recurring expenses to reduce manual effort.

Closing journal entry

A closing journal entry transfers balances from temporary accounts to permanent accounts at the end of an accounting period. This resets your revenue and expense accounts to zero for the new period.

Temporary accounts include revenue and expenses. Permanent accounts include assets, liabilities, and equity, such as retained earnings. Closing entries move your net income or loss into retained earnings.

Correcting journal entry

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

For example, if you accidentally debited office supplies instead of equipment, a correcting entry would reverse the error and post the amount to the correct account.

When to use journal entries

You'll need to create journal entries in several common business situations. Knowing when to use them helps you keep your books accurate.

Create journal entries when you:

• Record non-cash transactions: depreciation, accruals, or prepaid expenses
• Make corrections: fix errors in previously recorded entries
• Adjust for period-end: update accounts before closing the books
• Transfer between accounts: move funds between internal accounts
• Record complex transactions: payroll, loan payments, or multi-account purchases

You may not need manual journal entries when:

• Your accounting software automatically records bank transactions
• You use invoicing features that create entries automatically
• Standard transactions flow through connected apps

Most day-to-day transactions in Xero create journal entries automatically. Manual entries are typically needed for adjustments, corrections, and non-standard transactions.

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:

• The baking supplies account increases (debit)
• The cash account decreases (credit)

The journal entry:

How to record journal entries

Recording a journal entry correctly keeps your books accurate and your financial statements reliable. Follow these steps for each transaction.

1. Identify the transaction and accounts involved. Determine which accounts the transaction affects. Ask yourself: which account gains value and which loses value? Common accounts include cash, revenue, expenses, assets, and liabilities.
2. Classify each account as a debit or credit. Decide whether each account increases or decreases. Remember: debits increase assets and expenses; credits increase liabilities, revenue, and equity.
3. Record the date and description. Enter the transaction date and a brief description, such as "office supplies purchase." Clear descriptions make it easier to review entries later.
4. Enter the debit and credit amounts. Record the amounts in the correct columns. The total debits must equal the total credits for the entry to balance.
5. Post to your general ledger and review. Transfer the entry to your general ledger. Double-check that debits equal credits and that you've posted to the correct accounts.

If you spot an error later, use a correcting journal entry to fix it.

Simplify journal entries with Xero

Xero simplifies journal entries so you can focus on running your business. Here's how:

• Reduces manual data entry and errors with automated entries
• Keeps all your journals organised in one place with secure storage
• Generates financial statements that show your business health with real-time reporting

Financial tracking software from Xero automates your journal entries, keeps your records secure, and produces financial statements that help you make informed decisions. Get one month free and see how Xero simplifies your accounting.

FAQs on journal entries

Here are answers to some common questions about journal entries.

How do I fill out a journal entry?

To fill out a journal entry, you need the transaction date, account names, amounts, and a brief description.

1. Enter the transaction date.
2. Record the account names affected.
3. Enter debit and credit amounts in the correct columns.
4. Add a description of the transaction.
5. Verify that total debits equal credits.

Accounting software like Xero automates this process and helps prevent errors.

What's an example journal entry?

A journal entry for a £300 office supplies purchase would debit the office supplies account (increasing expenses) and credit the cash account (decreasing cash on hand). See the journal entry example section above for a detailed breakdown.

Can I use accounting software to track journal entries?

Yes. Accounting software like Xero automates journal entry creation, reduces manual errors, and generates financial reports directly from your entries. This saves time and helps keep your books accurate.

Can I edit or delete a journal entry after I've posted it?

Yes. In most accounting software, you can edit or delete journal entries before you finalise your accounts. After finalisation, you'll typically need to create a correcting or reversing entry instead.

Does Xero automatically create journal entries?

Yes. Xero creates journal entries automatically when you record invoices, payments, and bank transactions. You only need to create manual journal entries for adjustments, corrections, or non-standard transactions.

How long should I keep journal entry records?

Keep journal entry records for at least five to seven years, depending on your local tax requirements. In Australia, the Australian Taxation Office (ATO) requires you to keep records for five years. Check your local regulations for specific requirements.

What happens if my debits and credits don't balance?

If debits don't equal credits, your journal entry won't post correctly. Review each line to find the error. Common causes include typos, missing entries, or posting to the wrong account. Accounting software like Xero alerts you when entries don't balance.

Do I need an accountant to create journal entries?

Not necessarily. Many small business owners handle routine journal entries themselves using accounting software. However, an accountant can help with complex adjustments, tax-related entries, and year-end processes. Consider working with an accountant if you're unsure about specific transactions.