Journal entries in accounting: a guide and examples

Published Thursday 16 April 2026

Table of contents

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

Key takeaways

• Record every transaction using debits and credits, making sure total debits always equal total credits to keep your books balanced and your financial statements accurate.
• Choose the right type of journal entry for each situation: use simple entries for basic transactions, compound entries when multiple accounts are involved, and adjusting entries to capture income or expenses that span more than one period.
• Fix mistakes with a correcting journal entry that reverses the error and records the transaction correctly, so you maintain a clear audit trail without altering your original records.
• Automate recurring journal entries with accounting software to cut down on manual work, reduce errors, and free up time for other parts of your business.

Key takeaways

• Record every transaction using debits and credits, ensuring total debits always equal total credits.
• Use simple entries for basic transactions and compound entries when multiple accounts are involved.
• Follow a five-step process: identify accounts, classify as debit or credit, record details, enter amounts, and post to your ledger.
• Fix errors with correcting entries to maintain a clear audit trail without changing historical records.
• Automate routine entries with accounting software to save time and reduce manual mistakes.

What is a journal entry?

A journal entry is a record of a business transaction that uses debits and credits to track how money moves through your accounts. Each entry captures the date, amounts, and accounts affected to keep your books accurate.

Journal entries are fundamental to your accounting system. They feed directly into your general ledger, which means your financial statements reflect your actual business performance. This is a critical requirement for the 20,000 public companies that auditors regularly review.

Here's more on FASB accounting standards.

How journal entries work

Journal entries work by recording equal debits and credits for every transaction. This double-entry system keeps your books balanced and your financial records accurate.

Here's how debits and credits affect your accounts:

• debits increase asset and expense accounts
• credits increase liability, revenue, and equity accounts
• total debits must equal total credits in every entry

Here's a quick reference for how debits and credits affect each account type:

Debits increase asset accounts (cash, inventory, equipment) and expense accounts (rent, utilities, supplies).

Credits increase liability accounts (loans, accounts payable), revenue accounts (sales, service income), and equity accounts (owner's capital, retained earnings).

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

What are the different types of journal entries in accounting?

The seven main types of journal entries are: simple, compound, adjusting, reversing, recurring, closing, and correcting. Each serves a specific purpose in your accounting workflow.

Simple journal entry

A simple journal entry involves exactly two accounts: one debit and one credit for the same amount. Use simple entries for straightforward transactions like cash purchases, bill payments, or single-item sales.

Compound journal entry

A compound journal entry involves more than two accounts with multiple debits and credits. All debits must still equal all credits, regardless of how many accounts are involved.

Common uses for compound entries:

• payroll processing with wages, taxes, and deductions (ensure you keep all records of employment for at least four years to remain compliant)
• inventory purchases using multiple payment methods
• sales transactions that include discounts and taxes

Adjusting journal entry

An adjusting journal entry updates your account balances at the end of an accounting period. Use adjusting entries to record income or expenses that span multiple periods or might have been missed.

Common uses include estimated expenses, accruals, and deferred revenue. For example, if you complete a project over three months but invoice at the end, you'd record an adjusting entry each month for one-third of the revenue.

Reversing journal entry

A reversing journal entry undoes an entry from the previous period to simplify recording the actual transaction.

For example, if you accrued wages in December for work paid in January, you'd reverse that accrual in January when you record the actual payment.

Recurring journal entry

A recurring journal entry records transactions that repeat on a regular schedule, such as monthly rent, loan payments, or subscription fees. Many accounting software platforms let you automate these entries to save time.

Closing journal entry

A closing journal entry transfers balances from temporary accounts (revenue and expenses) to permanent accounts (retained earnings) at the end of an accounting period. This resets your temporary accounts to zero so you're ready for the next fiscal period.

Correcting journal entry

A correcting journal entry fixes errors in previous entries without deleting the original record. Use it when you've posted an amount to the wrong account or recorded an incorrect figure.

To correct an error, create a new entry that reverses the mistake and records the transaction correctly. This maintains a clear audit trail in your books, which is vital since the SEC requires accounting firms to retain certain records for seven years when they audit.

When to use journal entries

You need a journal entry whenever a transaction affects your business's finances. Here are common situations that require an entry:

• recording a cash sale to a customer
• purchasing inventory or supplies on credit
• paying employee wages
• receiving a loan from the bank
• adjusting accounts at the end of a period

Journal entry examples

Here's a simple journal entry example:

The Cozy Cake Shop bought baking supplies worth $300 on January 20, 2021. The bookkeeper debits the baking supplies account (increasing the asset) and credits the cash account (decreasing cash).

How to record journal entries

Recording journal entries correctly keeps your books accurate and helps you avoid costly mistakes. Follow these five steps for every transaction:

1. Identify the transaction and accounts involved

Start by identifying which accounts the transaction affects. Ask yourself: what did you receive, and what did you give up?

Examples:

• cash purchase: gain supplies (asset), lose cash (asset)
• credit sale: gain receivables (asset), recognize revenue
• loan payment: lose cash (asset), reduce loan balance (liability)

1. Classify the transaction as a debit or credit

Determine whether each account needs a debit or credit. Remember: debits increase assets and expenses, while credits increase liabilities, revenue, and equity.

1. Record the date and transaction details

Enter the transaction date and a brief description (such as "office supplies purchase") so you can easily reference the entry later.

1. Enter debit and credit amounts

Enter the amounts in your debit and credit columns, then verify that total debits equal total credits before moving on.

1. Post to your general ledger and review

Post the entry to your general ledger and run a final review to confirm the amounts balance and your accounts are accurate.

Streamline your journal entries with Xero

Xero simplifies journal entries by automating routine transactions and keeping your records accurate. Here's how it helps:

• automate recurring entries: reduce manual work and prevent common errors
• store records securely: keep all journal entries organized and accessible
• generate real-time reports: track business performance with instant financial statements

Ready to spend less time on bookkeeping? Get one month free and see how Xero can simplify your accounting.

FAQs on journal entries

Here are answers to common questions about journal entries.

What are the five types of journal entries?

The five most common types are simple, compound, adjusting, closing, and correcting entries. Simple entries affect two accounts, while compound entries involve multiple accounts. Adjusting and closing entries update your books at period-end, and correcting entries fix mistakes.

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

A simple entry affects exactly two accounts with one debit and one credit. A compound entry involves three or more accounts, such as a payroll entry that includes wages, taxes, and deductions.

How often should I make journal entries?

Record a journal entry every time a business transaction occurs. Consistent, timely entries keep your books accurate and give you reliable data for business decisions.

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

Create a correcting journal entry that reverses the mistake and records the transaction correctly. This maintains a clear audit trail without altering your original records.

Can Xero automatically create journal entries for me?

Yes. When you create invoices, record bills, or reconcile bank transactions in Xero, the software generates the corresponding journal entries automatically. This saves time and reduces manual errors.