The raison d’etre of accounting is to present a concise, timely, accurate narrative of an organization’s fiscal standing. Business leaders look to their finance teams for reality checks: Can we afford to hire a new engineer? How much runway do we have? Are we spending too much on operating expenses?
Journal entries are the fundamental building blocks that provide the answers to those and other questions. Journal entries list vital data, such as how much was debited and credited, when, and from which accounts. Each journal entry corresponds to one discrete business transaction and is eventually posted to the general ledger. The validity of all financial reports is affected by the accuracy—or inaccuracy—of the information entered at this level.
What Is a Journal Entry in Accounting?
A journal entry in accounting is the formal record of a single business transaction as part of double-entry bookkeeping. Each journal entry includes the date, the amount to be debited and credited, a brief description of the transaction, and the accounts affected. Depending on the company, a journal entry may list affected subsidiaries, tax details, and other information. It’s crucial to accurately enter complete journal data so that the general ledger and financial reports based on this information are also accurate and complete. Accounting software templatizes recurring journal entries and automatically executes them, minimizing the potential for error.
Journal entries are made in chronological order and follow the double-entry accounting system, meaning each entry will have both a debit and a credit column. Even when debits and credits are linked to multiple accounts, the amounts in both columns must be equal. For example, say a company spends $277.50 catering lunch for employees. The expense account increases by that amount, while the cash account, which is an asset, decreases by $277.50 because that money is now spent.
Key Takeaways
- Journal entries are a concise record of all transactions a business conducts, and they detail how transactions affect accounts and balances.
- All financial reporting is based on the data contained in journal entries, and there are various types to meet business needs.
- Every journal entry follows the double-entry system, so total debits and total credits must be equal for the books to balance.
- Accounting software automates journal entry recording and tracking, and AI tools can help create entries, code accounts, and identify unusual activity for review.
Journal Entries Explained
Every journal entry captures both sides of a financial transaction using the double-entry bookkeeping system, where total debits must equal total credits. This doesn’t necessarily mean one account goes up while another goes down. For example, taking out a bank loan increases both the cash account and the notes payable simultaneously. What matters is that the entry must always remain in balance.
Each entry uses account codes from the company’s chart of accounts, so the amounts are reflected in the right place. Entries are first recorded in the general journal, then posted to the general ledger, which feeds the financial statements and other management reporting. One miscoded journal entry can ripple all the way up through those reports, which is how journal entries earned their nickname as the “building blocks” of accounting and why getting each one right, starting with debits and credits, is essential.
What Are Debits and Credits?
Debits and credits are bookkeeping units that give instruction on whether to increase or reduce an account balance. A debit doesn’t simply mean “more” and a credit doesn’t simply mean “less”; rather, they perform differently depending on the type of account involved. Asset and expense accounts increase with debits and decrease with credits. Liability, equity, and revenue accounts work the opposite way, increasing with credits and decreasing with debits. These rules trace back to the accounting equation, where assets must equal liabilities plus equity. It’s why each account has a “normal balance.” Assets and expenses sit on the debit side, while liabilities, equity, and revenue sit on the credit side. Debits and credits are simply how each side stays in balance.
What Is the Purpose of a Journal Entry?
The purpose of a journal entry is to physically or digitally record every business transaction properly and accurately. If a transaction affects multiple accounts, the journal entry will detail that information as well. For instance, considering the catering example above—but from the catering company’s perspective—shows how a single transaction impacts multiple accounts, including cash, sales, state, and local taxes. The caterer’s compound journal entry might look like this:
| Catering for XYZ Corp. | Debit | Credit |
|---|---|---|
| Cash | $ 277.50 | |
| Sale | $ 250.00 | |
| State tax | $ 10.00 | |
| Local meals tax | $ 17.50 |
Thus, the journal enables the caterer to accurately account for cash in and taxes owed to multiple jurisdictions.
Accurate and complete journals are also essential in the auditing process, as journal entries provide detailed accounts of every transaction. Auditors, both internal and external, will look for entries or adjustments that lack the proper documentation, explanations, or approvals, or that sit outside the norm for the business.
When Are Journal Entries Used?
A business records a journal entry whenever a transaction changes the balance of an account. That covers everyday activities, such as making a sale, buying inventory, paying employees, or settling a supplier bill. Entries also come up at the end of an accounting period, when accountants record depreciation, accrue unpaid expenses, or close out temporary accounts.
Common Journals in Accounting
The accepted, standard practice is to use a double-entry accounting system, which generally entails the use of both a general ledger and a general journal. It can also include the use of 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 by date. It’s the first place a transaction is recorded. The amounts are then posted to the appropriate accounts, such as accounts receivables, cash accounts, or asset accounts.
Special Journal
Special, or specialized, journals contain frequent transactions within a given category and are normally used in manual bookkeeping to make it easier for businesses to find instances of particular types of transactions. Examples include sales journals and purchase journals that group sales to various customers or purchases from suppliers in one place. Accounting software negates the need for special journals by making it easy to sort transactions and search for granular details.
What Is Included in a Journal Entry?
Journal entries may contain multiple data points, but they generally include:
- Date: A header, which is a descriptor of the entry type, and the date entered in the journal.
- Identifier: A unique numerical identifier or reference number.
- Accounts: One or more accounts and amounts that will be debited and credited by the transaction.
- Debits and credits: The amount of each debit and credit listed separately by account; the total of debits must equal the total of credits.
- Description: A brief description of the transaction.
Journal entries may also include data specific to the business, such as the subsidiary or subsidiaries involved in the transaction and the currency or currencies used.
6 Types of Journal Entries
There are six types of journal entries—seven if you count the archaic, vague, and seldom-used single entry. The single journal entry isn’t used in standard accounting, which is double-entry based. It’s 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 they present a balanced, accurate, and objective statement of the company’s financial standing:
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Opening Entries
These entries carry over the ending balance from the previous accounting period as the beginning balance for the current accounting period. For example, the ending balance of the cash account on the balance sheet from the previous accounting period was $11,000. That balance of $11,000 is now the opening entry for the current accounting period.
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Transfer Entries
Transfer entries move, or allocate, an expense or income between accounts. For example, a manufacturing company transfers expenses from one department to another. No third party is involved in these entries, and transfers must always net zero.
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Closing Entries
These entries mark the end of an accounting period and serve two important purposes. First, they zero out temporary accounts, such as expense, loss, revenue, income, gain, income summary, and dividend or withdrawal accounts, so they start fresh in the new accounting period. Second, they transfer the net balance of those temporary accounts to a permanent account, typically called “retained earnings” on the balance sheet. For example, at the end of an accounting period, all revenue and expense accounts are closed out to zero. The resulting net profit or net loss is transferred to retained earnings, which carries that balance forward indefinitely as a permanent account. Permanent accounts, such as cash, accounts receivable, and notes payable, aren’t closed at period end as their ending balances carry forward naturally as the opening balances for the next accounting period.
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Adjusting Entries
Adjusting entries are entries that record changes to accounts that aren’t otherwise accounted 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 period as per matching and revenue recognition principles. Common examples are:
- An expense accrual refers to an expense incurred in an accounting period before it’s actually paid. An example is electricity used by a plant in the month before the utility issues a bill for the company to pay.
- A revenue accrual relates to work that has been performed or products that have been delivered but for which the customer hasn’t been invoiced.
- An expense deferral occurs when a payment is made in an accounting period prior to when the expense is actually incurred. An example is a payment made now for insurance that covers the following six-month period. Deferred revenue applies when a company receives payments in advance for services or products that are to be delivered in the future, which is a liability.
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Compound Entries
These entries record more than one account to be debited or more than one account to be credited. Every journal entry requires the total of debits and credits to be equal, but the number of accounts debited or credited don’t have to be equal. For example, there may be one debit but two or more credits, or one credit and two or more debits. Payroll may entail a large number of journal entries, which can be simplified into compounded form as a summary.
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Reversing Entries
Reversing entries are made at the beginning of a new accounting period and serve to reverse, or undo, an adjusting entry made at the end of the previous accounting period. This option provides a significant reduction in accounting errors caused by double-counting expenses or income and increases efficiency in processing actual invoices in the new accounting period. In other words, reversing entries are used to simplify bookkeeping. For example, an accrued expense reported in the previous accounting period can be reversed so the expense can be accounted for in the accounting period in 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 so that transactions are accurately recorded. Begin by deciding what transaction must be entered where. If you use accounting software, you’ll need to make fewer journal entries because automation embedded in the software will flow relevant data to other accounts and reports as needed. If you’re doing bookkeeping manually, to record a transaction properly, you’ll need to figure out everything the transaction affects on the company books.
Identify the Accounts That Will Be Affected
The first step is to identify the accounts that the transaction affects. That can be a bit confusing if you’re unfamiliar with accounting terms and principles. But in general, you’re looking for areas of impact from the transaction: Which accounts will gain something, and which will lose something in this transaction?
Sort Transactions First
Sorting transactions by type—expenses, bank deposits, quarterly taxes—will put you on the right 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 debits and credits, in related accounts. Determine where the money came from, where it went, what the transaction added to the business, and what it took away. The physics adage that “for every action, there is an equal and opposite reaction” holds true in accounting, 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 debits and credits in various affected accounts. Others may be a bit trickier. Here are some tips to help you figure it out:
- Get familiar with the basic account types: All journal entries use the basic account types: assets, liabilities, expenses, revenue, and equity. Once you recognize each of these types, it’ll be easier to understand what each entails, how they relate to other accounts, and how different types of transactions impact them.
- Use standard accounting rules to direct where to apply debits and credits: Accounting rules exist for good reasons, one of which happens to be standardizing what goes where in financial reports and journal entries. Look to the accounting rules for the defining word on where to apply debits and credits for any given journal entry.
Prepare Your Journal Entry
Now that you’ve identified the transaction type and the accounts it affects, you’re ready to make your journal entry using the following steps:
- Enter the correct date: Every journal entry must be dated so that it’s applied to the correct accounting period.
- Assign the account name and code: Note the account name and the unique identifying general ledger code. Transactions are coded to specific accounts for reporting purposes. Account balances feed the various line items on financial statements.
- Enter the debit and credit amounts: If you’re using accounting software, odds are that some of the debiting and crediting in a journal entry will be at least partially automated. If you’re keeping the company books by hand, you’ll need to double check to make certain you’ve entered all debits and credits accurately.
How to Record a Journal Entry: An Example
MyToys Manufacturing Co. buys $100,000 worth of raw materials. It pays $10,000 in cash and uses credit for the balance. The company would record a debit, or increase, of $100,000 in raw materials inventory. The cash account would show a credit, or decrease, of $10,000 because that was the amount paid in this transaction. The accounts payable account would show an increase, or credit, of $90,000 as the company now owes that amount to a vendor on a future date or dates.
As MyToys makes payments over time on this purchase, the cash account will show corresponding credits (less cash is available), and the accounts payable will show corresponding debits (less money is owed by the company). Further, as the raw materials are used to produce finished products—toys, in this case—a credit is applied to the raw materials account to reflect a decline in value as raw materials are consumed, and the finished goods account is debited to reflect an increase in the amount of inventory on hand.
How to Track Journal Entries
Tracking your business’ journal entries can be the differentiating factor when it comes to maintaining financial integrity. Just like balancing your personal checkbook, journal entry tracking verifies that all financial activity is accurately reflected in your company’s books. To track your entries, implement a standardized process and best practices like these:
- Establish a standardized procedure for recording journal entries.
- Invest in accounting software.
- Log entries in chronological order.
- Make sure entries include all necessary data points.
- Reconcile your books regularly.
- Maintain a record of who made each entry and when.
- Implement strict data security to prevent unauthorized access to journal entries.
Using ERP Software to Track Journal Entries
As transaction volume grows, tracking entries by hand becomes slow and mistakes get harder to catch. ERP software records journal entries automatically, posts them to the general ledger, and keeps a time-stamped audit trail. Recurring entries, such as depreciation or rent, can be set once and repeated each period. AI assistants can help draft entries straight from bills and invoices, suggest account coding, and highlight unusual entries, which helps catch a duplicate or a miscoded entry before it posts.
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 for Cash and Notes Payable
On October 1, 2026, Company ABC receives cash proceeds from a new note payable. On October 9 the company borrows another $20,000, and on October 10 it repays $10,000. The T-account would look as follows:
T-accounts for Cash and Notes Payable that reflect initial borrowing and a subsequent drawdown and repayment.
| Date | Cash | Notes Payable | ||
|---|---|---|---|---|
| Dr. (increase) | Cr. (decrease) | Dr. (decrease) | Cr. (increase) | |
| 01-10-2026 | $10,000 | $10,000 | ||
| 09-10-2026 | $20,000 | $20,000 | ||
| 10-10-2026 | $10,000 | $10,000 | ||
| Balance | $20,000 | $20,000 | ||
The journal entries for these same transactions would look like this:
| Date | Account name | Debit | Credit |
|---|---|---|---|
| 1-Oct-26 | CASH | 10,000 | |
| Notes Payable | 10,000 | ||
| To record initial borrowing | |||
| Date | Account name | Debit | Credit |
|---|---|---|---|
| 9-Oct-26 | CASH | 20,000 | |
| Notes Payable | 20,000 | ||
| To record additional borrowing | |||
| Date | Account name | Debit | Credit |
|---|---|---|---|
| 10-Oct-26 | Notes Payable | 10,000 | |
| CASH | 10,000 | ||
| To record repayment | |||
General Journal
The following is an excerpt of a general journal. It’s a running list of all journal entries in sequential order, showing the date, accounts, debit and credit amounts, and a reference number for each.
| Date | Details | Debit | Credit | Ref |
|---|---|---|---|---|
| 1-Aug-26 | Depreciation | 10,000 | NS2026--400 | |
| Accumulated depreciation | 10,000 | |||
| *Depreciation August 2026 | ||||
| 1-Sep-26 | Raw materials | 2,500 | NS2026--500 | |
| Cash | 2,500 | |||
| *Purchase toy making supplies | ||||
| 15-Sep-26 | Utilities | 500 | NS2026--600 | |
| Cash | 500 | |||
| *Mfg facility electricity | ||||
| 1-Oct-26 | Cash | 20,000 | NS2026--700 | |
| Capital | 20,000 | |||
| *VC investment for new toy | ||||
Make Journal Tracking Easy With NetSuite
As accounting grows in complexity and the volume of journal entries increases, manual tracking becomes more difficult and slows down the close, which delays financial reporting. NetSuite Financial Management records journal entries, posts them to the general ledger, and maintains a complete audit trail of who entered what and when. Recurring and allocation entries run on a set schedule, so routine postings don’t have to be rekeyed each period. NetSuite Bill Capture helps draft entries using information from supplier invoices, saving time and increasing accuracy. Anomaly detection singles out entries that fall outside normal patterns before they impact the numbers. The payoff is a faster close and cleaner records, plus staff time that can be reallocated where needed.
Journal entries are the backbone of all financial reporting, so accuracy is critical. As such, every transaction must be verified and its corresponding journal entry checked for compliance with accounting rules, whether the books are completed manually or digitally. When each entry is recorded correctly, the reports built on them give a true picture of where the business stands today and a solid basis for deciding what comes next.
Journal Entries FAQ
What is the format of a journal entry?
A journal entry lists the transaction date, the accounts affected, the amount debited, the amount credited, and a brief description. Many also include a reference number. The format follows the accounting adage “debits to the left, credits to the right,” meaning debits are recorded first, with credits below and slightly indented.
How do you make a journal entry?
Start by identifying which accounts the transaction affects and whether each account increases or decreases. Then debit and credit the correct accounts so the two sides are equal, add the date and a short description, and post the entry to the ledger.
What is the significance of journal entries in accounting?
Journal entries are the source record behind every number in a company’s financial statements.
What are the three rules of a journal entry?
Every journal entry follows three rules. It records at least one debit and one credit, the total debits equal the total credits, and it’s dated and posted in chronological order. Some accountants also follow the traditional “three golden rules,” which assign debits and credits based on account type: Personal accounts debit the receiver and credit the giver; permanent accounts debit what comes in and credit what goes out; temporary accounts debit expenses and losses and credit income and gains.
