Journal entry: what it is and how to record one for your small business

Published Wednesday 26 November 2025

Table of contents

• What is a journal entry?
• Why journal entries matter for your business
• How journal entries work
• What are debits and credits?
• What are the different types of journal entries in accounting?
• Journal entry example
• How to record journal entries
• Streamline your journal entries with Xero
• FAQs on journal entries

Key takeaways

• Record journal entries for every business transaction using the double-entry system, ensuring total debits always equal total credits to maintain accurate financial records and comply with accounting standards.

• Implement automated accounting software like Xero to streamline journal entry processes, reduce manual errors, and create entries automatically from bank transactions while maintaining real-time balance checking.

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

• Follow the five-step process for recording entries: identify affected accounts, classify as debits or credits, record transaction details with dates, enter amounts, and post to your general ledger while verifying balance accuracy.

What is a journal entry?

A journal entry is a detailed record of every business transaction that shows which accounts are affected and by how much. Each entry captures essential data: the transaction date, the accounts involved, and the amounts debited and credited.

Journal entries form the foundation of your financial records. They feed directly into your general ledger and ensure your financial statements, including your balance sheet, accurately reflect your business's financial position.

Here's more on preparing annual accounts.

Why journal entries matter for your business

Journal entries are the building blocks of your financial records. Each entry tells a small story about a transaction, and together they create a complete picture of your business's financial health. Each entry tells a small story about a transaction, and together they create a complete picture of your business's financial health. Accurate journal entries help you:

• Understand your cash flow, profitability, and where your money is going
• Keep your financial statements accurate, which helps you secure loans or investment
• Prepare and file your tax returns more easily, with less stress and fewer errors
• Spot trends, manage expenses, and find opportunities for growth by reviewing your journal entries

How journal entries work

Journal entries track account balance changes using debits and credits. Every transaction requires at least two entries to maintain balance in your books.

Here's how the system works:

• Each transaction affects at least two accounts - money flows from one account to another
• Debits and credits must equal - if you debit £100, you must credit £100
• The accounting equation stays balanced - assets = liabilities + equity

Here’s how debits and credits work:

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

What are debits and credits?

Debits and credits are the two sides of every accounting transaction. They work like a seesaw – when one side goes up, the other must go down by the same amount.

Debits increase:

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

Credits increase:

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

The key rule: total debits must always equal total credits in every journal entry.

What are the different types of journal entries in accounting?

Journal entry types vary based on the transaction you're recording and when you record it. Most small businesses use these seven main types:

Simple journal entry

Simple journal entries affect exactly two accounts - one debit, one credit. Use these for straightforward transactions like cash sales, bill payments, or equipment purchases.

Compound journal entry

Compound journal entries involve more than two accounts but still balance perfectly. Use these for complex transactions like payroll or bulk purchases.

Common compound entry scenarios:

• Payroll: Wages expense (debit), various tax withholdings (credits), net pay (credit)
• Bulk purchases: Multiple inventory items (debits), single payment (credit)
• Loan payments: Interest expense (debit), loan principal (debit), cash payment (credit)

Adjusting journal entry

You make an adjusting journal entry to update account balances before you prepare your financial statements at the end of an accounting period. This helps your statements reflect the most accurate information.

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

You use adjusting entries for things like estimated expenses, accruals, and income you have earned but not yet invoiced. For example, if you work on a project for three months but only invoice at the end, you can use an adjusting entry each month to record a third of the income.

Reversing journal entry

You use a reversing entry when you need to correct a journal entry from a previous period. This makes it easier to record future transactions.

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

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

Closing journal entry

You make a closing journal entry at the end of an accounting period. This transfers balances from your temporary accounts, like revenue and expenses, to your permanent accounts, such as retained earnings. This gets your accounts ready for the next period.

Correcting journal entry

You use a correcting journal entry to fix errors in your records and simplify your bookkeeping. For example, if you record a transaction in the wrong account, you enter a correcting journal entry to move the amount to the right place.

Journal entry example

The Cosy Cake Shop bought baking supplies worth £300 on 20 January 2021. The bookkeeper increases the balance of the baking supplies account and decreases the cash account, and makes a simple journal entry to show 1) an increase in the baking supplies account; and 2) a decrease in the cash account (the bank account) for the same amount.

Here's what the simple journal entry looks like:

How to record journal entries

Recording journal entries correctly ensures your financial records stay accurate and balanced. Follow these five steps for every transaction:

Identify the transaction and accounts involved

Choose the transaction to record, then identify which accounts it affects – such as your cash, revenue, or expense accounts. If it's tricky to work it out, ask yourself "which account will lose and which will gain with this transaction?"

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 (like 'office supplies purchase'). This keeps your accounting clear and organised.

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

Once you check your debit and credit entries are equal, post them to your general ledger. Check again that your debits and credits balance and your ledger accounts are accurate.

You might need an extra step if you need to correct a journal entry.

Streamline your journal entries with accounting software

Manual journal entries take time and can lead to mistakes. Accounting software helps you save time and gives you better insights into your business.

Xero accounting software journal entry features:

• creates entries from your transactions
• Customizable templates for recurring entries
• Real-time error checking ensures entries always balance
• Instant financial reporting shows your business performance

You can try Xero for free to see how automated journal entries help you save time and keep your records accurate.

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.

FAQs on journal entries

Find answers to common questions about journal entries below.

How do I fill out a journal entry?

To fill out a journal entry, gather your transaction details first, then follow this format:

Required information:

• Transaction date
• Account names affected
• Transaction description
• Debit and credit amounts

Entry steps:

1. Date: Record when the transaction occurred
2. Reference: Add a tracking number or code
3. Accounts: List the accounts being debited and credited
4. Amounts: Enter debit and credit figures
5. Balance check: Ensure total debits equal total credits

automates this process and prevents calculation errors.

What's an example journal entry?

Imagine your business buys £300 of office supplies with cash. The journal entry would look like this:

• Date: 25/10/2024
• Account Debited: Office Supplies (£300)
• Account Credited: Cash (£300)
• Description: Purchased office supplies for cash

This entry increases your office supplies account and decreases your cash by the same amount.

Can I use accounting software to track journal entries?

Yes, accounting software transforms journal entry management by automating routine entries and eliminating manual errors.

• Automatic bank feeds create entries from your transactions
• Built-in templates for recurring entries like rent or utilities
• Real-time balance checking prevents posting errors
• Instant financial reports show your business performance

Software like Xero handles the technical details while you focus on running your business.

What's the difference between a journal entry and a ledger entry?

You record each transaction in a journal entry as it happens. Then, you post the details to specific accounts in your general ledger. The journal keeps a record of every transaction, and the ledger organises them by account.

How often should I make journal entries?

Record journal entries as transactions happen, or at regular intervals such as daily or weekly. Stay consistent and timely. You must keep records for six years from the end of the last company financial year they relate to. Accounting software can help by recording many transactions automatically, so your books stay up to date.