Journal Entries: A Beginner’s Guide for Accountants (2024)

The raison d'etre of accounting is to present a concise, timely, accurate narrative of anorganization’s fiscal standing. Business leaders look to their finance teams forrealitychecks: Can we afford to hire a new engineer? How much runway do we have? Are we spendingtoo much on operating expenses?

Journal entries are the fundamental building blocks that provide the answers to those andother questions. Journal entries list vital data, such as how much was credited and debited,when and from which accounts. Each journal entry corresponds to one discrete businesstransaction and is eventually posted to the general ledger.

The validity of all financial reports is affected by the accuracy — or inaccuracy— of theinformation entered at this level.

What Is a Journal Entry in Accounting?

Each journal entry contains the data significant to a single business transaction, includingthe date, the amount to be credited and debited, a brief description of the transaction andthe accounts affected. Depending on the company, it may list affected subsidiaries, taxdetails and other information.

It’s crucial to accurately enter complete journal data so that the general ledger andfinancial reports based on this information are also accurate and complete. With modernaccounting software, recurring journal entries may be templatized and automaticallyexecuted, minimizing the potential for error.

Journal entries are made in chronological order and follow the double-entry accountingsystem, meaning each will have both a credit and a debit column. Even when debitsand credits are linked to multiple accounts, the amounts in both columns must be equal. Forexample, say a company spends $277.50 catering lunch for employees. The expenses accountincreases by that amount, while the cash account, which isan asset, decreases by $277.50 because that money is now spent.

Key Takeaways

• A journal is a concise record of all transactions a business conducts; journal entriesdetail how transactions affect accounts and balances.
• All financial reporting is based on the data contained in journal entries, and there arevarious types to meet business needs.
• Adjusting journalentries,for example, are used to accrue or defer revenue andexpenses, change or correct previous entries or estimate non-cash transactions, likeallowances for debt that has been written off.

What Are Debits and Credits?

Debits add to expense and asset accounts and subtract from liability,revenue and equity balances, while credits subtract from expense and assetbalances and add to liability, revenue and equity accounts.

In accounting, the basic principle is the same: An adjusting journal entry to account for theaccruing interest on a bank loan will debit the Interest Expense account and credit theAccrued Interest Payable account.

What Is the Purpose of a Journal Entry?

The purpose of a journal entry is to physically or digitally record every businesstransaction properly and accurately. If a transaction affects multiple accounts, the journalentry will detail that information as well.

For example, say our catering purchase incurs both state and local taxes. That compoundjournal entry might look like this:

Thus, the journal enables the caterer to accurately account for taxes owed to multiplejurisdictions.

Journal entries are the foundation of effective record-keeping. They are sorted into variouscharts of accounts and, once verified for accuracy, posted to the general ledger, whichthen feeds information to the financial reports that business decision-makers depend on.

Accurate and complete journals are also essential in the auditing process, as journal entriesprovide detailed accounts of every transaction. Auditors, both internal and external, willlook for entries or adjustments that lack the proper documentation, explanations orapprovals or that are outside the norm for the business.

What Is Included in a Journal Entry?

Journal entries may contain multiple data points but generally include:

• A header, which is a descriptor of the entry type, and the date entered in the journal;
• A unique numerical identifier or reference number;
• One or more accounts and amounts that will be debited by thetransaction and the date(s) these debits are made;
• One or more accounts and amounts the transaction will credit and thedate(s) these credits are made; and
• A brief description of the transaction.

Journal entries may also include data specific to the business, such as the subsidiary orsubsidiaries involved in the transaction and the currency or currencies used.

How to Record a Journal Entry

MyToys Manufacturing Co. buys $100,000 worth of raw materials. It pays $10,000 in cash anduses credit for the balance. The company would record a debit, or increase, of $100,000 inraw materials. The Cash account would show a credit, or decrease, of $10,000because that was the amount paid in this transaction. The Accounts Payable Accountwould show an increase, or credit, of $90,000 as it now owes that amount to a vendor on afuture date or dates.

As MyToys makes payments over time on this purchase, the Cash Account will show acorresponding credit (less cash is available) and the Accounts Payable a corresponding debitas less money is owed by the company.

Further, as the raw materials are used to produce finished products — toys, in thiscase — acredit is applied to the Raw Materials account to reflect a decline in value as rawmaterials are consumed, and the Finished Goods account is debited to reflect an increase inthe amount of inventory on hand.

6 Types of Journal Entries

There are six types of journal entries, or seven if you count the archaic, vague andseldom-used single entry. The single journal entry is not used in standard accounting, whichis double-entry based. It is more suited to checkbook balancing than to business accounting,which involves many accounts.

Each of the primary six entry types has a specific function in accounting. Together theypresent a balanced, accurate and objective statement of the company’s financialstanding.

They are:

1. Opening entries

   These entries carry over the ending balance from the previous accounting period asthe beginning balance for the current accounting period. For example: The endingbalance of the Cash account on the balance sheet from the previous accounting periodwas $11,000 after all liabilities were paid for the period. That balance of $11,000is now the opening entry for the current accounting period.

2. Transfer entries

   Transfer entries move, or allocate, an expense or income from one account to another.For example, MyToys Manufacturing transfers cash from its main account to asubsidiary. A transfer journal entry accounts for the transfer of the money from oneaccount to another. No third party is involved in these entries, and transfers mustalways net zero.

3. Closing entries

   These entries mark the end of an accounting period at a balance that can then betransferred from a temporary account to a permanent one, or from one accountingperiod to the next. In the case of temporary accounts, the closing entry zeros outthe account, and any balance above that is transferred to another, more permanentaccount. The temporary account is then closed.

   Examples of temporary accounts include expense and loss accounts; revenue, income andgain accounts; income summary accounts; and dividend or withdrawal accounts. In thecase of accounting periods, the closing entry reflects the ending balance for thataccount at the end of that accounting period. That value is then transferred as theopening entry for the next accounting period. In that case, it is the accountingperiod for that account, which is closed.

4. Adjusting entries

   Adjusting entries are entries that record changes to accounts that are not otherwiseaccounted for in the journal, in compliance with the accrual method of accounting.These entries are entered in the general ledger at the end of an accounting periodas per matching and revenue recognition principles. Common examples are accruals,deferrals and estimates.

   An expense accrual refers to an expense reported in an accountingperiod before it is actually paid. An example is electricity used by a plant in themonth before the utility issues a bill for the company to pay.

   A revenue accrual relates to work that has been performed orproducts that have been delivered but for which the customer has not been invoiced.

   An expense deferral occurs when a payment is made in an accountingperiod prior to when the expense is actually incurred. An example is a payment madenow for insurance that covers the following six-month period. Deferredrevenue applies when a company receives payments in advance forservices or products that are to be delivered in the future.

5. Compound entries

   These entries record more than one account to be debited or more than one account tobe credited. The rule of journalentry requires the total of debits and credits to be equal, but the numberof credits and debits do not have to be equal. For example, there may be one debitbut two or more credits, or one credit and two or more debits, or even two or morecredits and debits. For example, Payroll may entail a large number of journalentries, which can be simplified into compounded form as a summary.

6. Reversing entries

   Reversing entries are made at the beginning of a new accounting period and serve toreverse, or undo, an adjusting entry made at the end of the previous accountingperiod. This option provides a significant reduction in accounting errors due todouble-counting expenses or income and increases efficiency in processing actualinvoices in the new accounting period. In other words, they are used to simplifybookkeeping. For example, an accrued expense reported in the previous accountingperiod can be reversed so the expense can be accounted for in the accounting periodin which it was paid, without worrying about reporting the expense twice.

How to Prepare Journal Entries for Your Business

It’s important to prepare journal entries properly to ensure transactions areaccuratelyrecorded. Begin by deciding what transaction must be entered where. If you use accountingsoftware, you’ll need to make fewer journal entries because automation embedded inthe software will flow relevant data to other accounts and reports as needed.

If you are doing bookkeeping manually, to record a transaction properly, you’ll need tofigure out everything the transaction affects on the company books.

Identify the accounts that will be affected:

The first step is in identifying the accounts that the transaction affects. That can be a bitconfusing if you’re unfamiliar with accounting terms and principles. But in general,you’relooking for areas of impact from the transaction: Which accounts will gain something, andwhich will lose something in this transaction?

Sort transactions first:

Sorting transactions by type — expenses, bank deposits, quarterly taxes — willput you on theright path to recording these transactions correctly.

Follow the money:

Now that the transaction is sorted, think about how it affects the values, in terms of debitsand credits, in related accounts. Ask yourself, Where did the money come from, and where didit go? What did the transaction add to the business, and what did it take away? The physicsadage that “for every action, there is an equal and opposite reaction” holdstrue inaccounting, too. Make sure you identify all actions and reactions caused by the transaction.

Determine your account type:

Some transactions are easy to map in terms of credits and debits in various affectedaccounts. Others may be a bit trickier. Here are some tips to help you figure them out,

• Get familiar with the basic account types: All journal entries fallinto one of the basic account types: Assets, Liabilities, Expenses, Revenue andEquity. Once you recognize each of these types, it will be easier to understand whateach entails, how they relate to other accounts and how different types oftransactions affect them.

• Use standard accounting rules to direct where to apply credits anddebits: Accountingrules exist for very good reasons, one of which happens to be standardizingwhat goes where in financial reports and journal entries. Look to the accountingrules for the defining word on where to apply debits and credits for any givenjournal entry.

Prepare your journal entry:

Now that you’ve identified the transaction type and the accounts it affects,you’re ready tomake your journal entry.

• Enter the correct date: Every journal entry must be dated to ensure the data itcontains is applied to the correct accounting period.

• Assign the account name and code: Note the account name and theunique identifying general ledger code. Transactions are coded to specific accountsfor reporting purposes. Account balances feed the various line items on financialstatements.

• Enter the debit and credit amounts: If you’re using accountingsoftware, odds are that some of the crediting and debiting in a journal entry willbe at least partially automated. If you’re keeping the company books by hand,you’llneed to double check to ensure you have entered all credits and debits accurately.

Examples of Common Journals in Accounting

The accepted, standard practice is to use a double-entry accounting system, which generallyentails the use of both a general ledger and a general journal. It can also include the useof special journals for frequent transactions within a specific category.

General journal

A general journal is a book of raw business transactions recorded in chronological order bydate. It is the first place a transaction is recorded. The amounts are then posted to theappropriate accounts such as accounts receivables,cash accounts or asset accounts.

Special journal

Special, or specialized, journals contain frequent transactions within a given category andare normally used in manual bookkeeping, to make it easier for businesses to find instancesof particular types of transactions. Examples include sales and purchase journals that groupsales to various customers or purchases from suppliers in one place. Modern accountingsoftware negates the need for special journals by making it easy to sort transactions andsearch for granular details.

How to Track Journal Entries

Tracking your business’ journal entries can be the differentiating factor when it comesto maintaining financial integrity. Just like balancing your personal checkbook, journalentry tracking ensures that all financial activity is accurately reflected in yourcompany’s books. To track your entries, implement a standardized process and bestpractices like these:

1. Establish a standardized procedure for recording journal entries.
2. Invest in modern accounting software.
3. Log entries in chronological order.
4. Make sure entries include all necessary data points.
5. Reconcile your books regularly.
6. Maintain a record of who made each entry and when.
7. Implement strict data security to prevent unauthorized access to journal entries.

Examples of Journal Entries

T-accounts are a visual representation of the general ledger account. Here are some examples,as well as additional journal entry types.

Two T-accounts: Cash and notes payable

*Interest income accrued in previous month, received in current month

*Interest income accrued but not received

General Journal

Using Accounting Software for Tracking Journal Entries

As accounting grows in complexity and journal entries grow in number, tracking becomes moredifficult, especially in manual entry systems. Accounting software is a better solution formost companies because much of the effort around journal entry tracking, pulling andallocating to accounts can be automated.

Automation delivers increased efficiency andreduced error rates. Further, modern accounting software will greatly ease the auditprocess.

Journal entries are the backbone of all financial reporting. As such, transactions must beverified and the corresponding journal entries cross-checked for accuracy. Whether the booksare completed manually or digitally, credits and debits on affected accounts must beallocated according to standard accounting rules.

From these simplified but exacting measures, a company can know where it stands financiallyand how far it can go with future plans.