What Is a Journal Entry?
A journal entry is the record of a single business transaction in the accounting system, written as a set of debits and credits. Every transaction a business makes enters the books as a journal entry, which is why the journal is described as the book of original entry: it is where a transaction is first recorded before it flows to the general ledger.
The Parts of a Journal Entry
- Date:
when the transaction occurred, which determines the period it belongs to. - Accounts affected:
at least one account debited and at least one credited. - Debit and credit amounts:
which must be equal in total for the entry to balance. - Reference number:
a unique identifier linking the entry to its documentation. - Description or memo:
a short explanation of what the transaction was. - Supporting document:
the invoice, receipt, or contract that evidences it.
Convention puts debits first and credits indented beneath them. The indentation is not decorative: it is how a reader tells at a glance which side each account sits on.
The Rule That Governs Every Entry
Double-entry bookkeeping requires that total debits equal total credits in every entry. What each side does depends on the account type:
- Assets and expenses:
increase with a debit, decrease with a credit. - Liabilities, equity, and revenue:
increase with a credit, decrease with a debit.
This is the source of most confusion for people learning entries, because 'debit' and 'credit' carry everyday meanings that do not apply here. A debit is not a decrease and a credit is not an increase. They are simply the left and right sides of an entry, and their effect depends entirely on which account they touch.
How to Write a Journal Entry
- Identify what happened.
Determine the transaction and the date it occurred. - Identify the accounts involved.
Usually two, sometimes more. - Classify each account.
Asset, liability, equity, revenue, or expense. - Decide the direction.
Apply the rules above to determine which account is debited and which is credited. - Confirm the entry balances.
Total debits must equal total credits. - Write the description.
Enough detail that someone reviewing it later can understand it without asking.
Journal Entry Examples
EXAMPLE
Paying a supplier invoice of $4,200
Debit: Accounts Payable $4,200
Credit: Cash $4,200
The liability is reduced and cash decreases.
EXAMPLE
Recording a supplier invoice for inventory of $9,000
Debit: Inventory $9,000
Credit: Accounts Payable $9,000
An asset increases and a liability is created. No cash has moved yet.
EXAMPLE
Monthly depreciation of $1,500
Debit: Depreciation Expense $1,500
Credit: Accumulated Depreciation $1,500
An expense is recognized without any cash leaving the business.
EXAMPLE
A compound entry: paying an invoice and taking a 2% discount
Debit: Accounts Payable $9,000
Credit: Cash $8,820
Credit: Purchase Discounts $180
Three accounts, one transaction, still balanced.
Types of Journal Entries
- Standard entries:
routine transactions such as sales, purchases, and payments. - Compound entries:
any entry touching more than two accounts, like the discount example above. - Adjusting entries:
posted at period end to record accruals, prepaid amortization, and depreciation. - Reversing entries:
posted at the start of a period to back out the prior period's accruals. - Closing entries:
posted at year end to move revenue and expense balances into retained earnings. - Recurring entries:
identical entries posted each period, such as a fixed rent charge.
Common Journal Entry Mistakes
- Wrong period:
posting to the month the invoice arrived rather than the month the cost was incurred. - Reversed debit and credit:
the entry balances but moves both accounts the wrong way, which a trial balance will not catch. - Inconsistent coding:
the same expense type posted to different accounts depending on who entered it. - Missing documentation:
an entry with no supporting invoice or calculation is the first thing an auditor questions. - Unreversed accruals:
an estimate left in place after the real invoice posts, double-counting the cost.
The reversed debit and credit is the most dangerous of these, because every automated check still passes. Total debits equal total credits, the trial balance agrees, and nothing flags. Only someone reading the entry catches it.
Frequently Asked Questions About Journal Entry
1. What is a journal entry?
A journal entry is the record of a single business transaction in the accounting system, written as debits and credits. It is the first place a transaction is recorded, before the amounts flow through to the general ledger.
2. What are the parts of a journal entry?
The date, the accounts debited and credited, the amounts on each side, a unique reference number, a description of the transaction, and the supporting document that evidences it. Debits are listed first with credits indented beneath.
3. How do you write a journal entry?
Identify the transaction and date, determine which accounts are affected, classify each as asset, liability, equity, revenue, or expense, apply the debit and credit rules to decide direction, confirm total debits equal total credits, then write a clear description.
4. What is an example of a journal entry?
Paying a $4,200 supplier invoice is recorded as a debit to Accounts Payable of $4,200 and a credit to Cash of $4,200. The liability is reduced and cash decreases, with total debits equalling total credits.
5. What are the different types of journal entries?
Standard entries for routine transactions, compound entries touching more than two accounts, adjusting entries at period end, reversing entries that back out prior accruals, closing entries at year end, and recurring entries posted identically each period.
6. What is a compound journal entry?
A compound journal entry affects more than two accounts in a single transaction. Paying a $9,000 invoice with a 2% discount debits Accounts Payable $9,000 and credits both Cash $8,820 and Purchase Discounts $180.
7. Why do debits have to equal credits?
Double-entry bookkeeping records every transaction twice, as a source and a use, so the accounting equation stays balanced. If debits and credits do not agree, the entry is incomplete or incorrect and the trial balance will not balance.
