What is a journal entry in accounting? A comprehensive guide

What is a journal entry?

A journal entry in accounting is a detailed record of a business transaction, usually using a double-entry system. You make journal entries to input essential transaction data into your business’s financial records: the amounts debited and credited, when, and from which accounts.

Journal entries are part of your financial accounting basics. They’re central to your business’s general ledger and the validity of your financial statements, including your balance sheet, and help you report your business finances correctly.

Here's more on FASB accounting standards.

How journal entries work

A journal entry shows when an account balance changes. Each change is entered as a ‘credit’ or a ‘debit’. In double-entry bookkeeping, you make at least two journal entries for every transaction.

These debit and credit entries are a bit counterintuitive in practice, so take the time to work out which is which.

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

Another way to understand credits and debits in journal entries is to remember they work in the opposite way in each financial account. For instance:

• Debits add to expense and asset accounts, and subtract from liability, revenue and equity balances.
• Credits subtract from expense and asset balances, and add to liability, revenue and equity accounts.

Debits and credits must balance in each journal entry and accounting equation. So, in its simplest form, a £100 debit must also be a £100 credit in the same journal entry.

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 different types of journal entries depend on the transaction you’re recording. Here are the most common.

Simple journal entry

A simple journal entry affects only two accounts: a debit and a credit, which correspond to each other – when one account goes up, the other goes down by the same amount. This type of journal entry records simple transactions, like cash purchases, that affect only two accounts.

Compound journal entry

Use a compound journal entry for multiple debits and credits across more than two accounts.

A compound journal entry captures all debits and credits related to a single accounting event, such as your payroll, which includes not just an employee’s wages, but taxes and other deductions. A compound journal entry captures all this data in one entry. Although there are more accounts involved, the sum totals (after you’ve included all debits and credits) should equal the same amount.

While a simple journal entry has only one entry each in the debit and credit columns, a compound journal entry lists each figure in the debit column against its description (such as wage expenses), and in the credit column lists each credited figure, like payable income taxes.

Adjusting journal entry

You make an adjusting journal entry to update account balances before preparing financial statements at the end of an accounting period, so the statements will include the correct information.

You’d make an adjusting journal entry to catch unrecognized 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 – like if a construction company works for three months but only invoices once the work is done complete. To account for this deferred revenue they’d need to include an adjusting journal entry each month of one third of the revenue it will invoice for.

Reversing journal entry

You might make a reversing entry to correct journal entries made in the previous period to simplify the recording of 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

This is the final journal entry to close an accounting period. It’s used to transfer balances from temporary accounts (such as revenue and expense accounts) to permanent accounts (like retained earnings). This lets you close out your revenue and expense accounts so you’re ready for the next fiscal period.

Correcting journal entry

A correcting journal entry fixes errors in your journal entries to simplify your bookkeeping later. You’d use this for simple errors, like recording a journal entry in the wrong account – you’d enter a correcting journal entry to signal the amount was misposted and 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, 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

Here are the general steps to record a journal entry correctly:

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 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

Once you’ve checked your debit and credit entries are equal, post them as general ledger entries. Before finalizing, run any final checks to make sure the debit and credit amounts balance, and your ledger accounts are accurate.

You might need an extra step or two – if a journal entry was made incorrectly and you need to correct it, say.

FAQs on journal entries

How do I fill out a journal entry?

You’ll first need the transaction date, account names, debits, credits, and descriptions of each transaction you’re recording. First, enter the transaction date, then assign a code number so you can track it. Enter the account name and a description, then input the debit and credit amounts in the correct columns. Make sure the debit and credit entries balance (are the same). If you’re doing this by hand, check your work carefully – accounting software like Xero automates the process to prevent manual mistakes.

What’s an example journal entry?

Date: 10/25/2024

Description: Purchased office supplies for cash

Account: Office Supplies

Debit: $300

Account: Cash

Credit: $300

This journal entry example shows a common transaction for small businesses: office supplies. Here, the business spent $300 in cash. The transaction is recorded by debiting the ‘Office supplies’ account, which increases expenses, and by crediting the ‘Cash account’, which decreases the cash on hand.

Can I use accounting software to track journal entries?

Yes! Accounting software can streamline the entire journal entry tracking process, from automating the creation of journal entries to producing precise financial reports, saving you time and giving you confidence in your finances.

Master Accounting Basics with Xero

Xero’s financial tracking software automates your journal entries, keeps your journals together securely, and produces financial statements that help you track your business’s financial health.