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What are journal entries in accounting?

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Last editedApr 20212 min read

Keeping detailed journal entries is a key component of accounting, ensuring that business transactions are recorded accurately. Keep reading to learn more about what needs to be included in each transaction and see a journal entry example to help you get started.

What is a journal entry?

When business transactions take place, they must be recorded in your organisation’s accounting system. This is accomplished with journal entries. Each journal entry shows you the transaction’s date and description, as well as any amounts that are debited or credited. It provides a quick overview of any accounts impacted by each transaction, allowing you to view incoming and outgoing resources.

If you use the double-entry accounting system, each transaction will involve both a credit and debit to your accounts. As a result, journal entries should show equal debit and credit values. For example, if your business purchases office supplies using cash, the transaction will be recorded in both the cash account and supplies account.

The purpose of accounting journal entries

Journal entries ensure that all transactions are recorded accurately according to the double-entry bookkeeping method, which we’ve mentioned above. A journal entry provides the opportunity to ensure that both credits and debits are recorded at the same time, forming the foundation for future financial reports. If the company’s finances are audited or analysed, it’s easy to go back to these carefully documented journal entries.

Accounting journal entries are also important because they ensure that the business follows the principles included under the general accounting equation.

What to include in your journal entry

You can ensure that your journal entry includes all relevant information by marking down the following information:

Date of the transaction
Reference or journal entry number for future retrieval
Names and numbers of relevant accounts
Amounts that need to be credited or debited
Description of the transaction

Accounting software will use a uniform layout for each entry, giving prompts to fill in each field as needed. However, you could choose to record your own journal entries with a simple table like the following:

Reference number and date	Debit	Credit
Account name and number
Account name and number
Description of transaction

How to record accounting journal entries

Using the table above, you must enter the same amount in the debit column and credit column. The account names and numbers will depend on the type of transaction you’re recording, whether it’s accounts receivable or cash.

It’s also important to be aware of different types of journal entries apart from the general format above.

Adjusting entry: These are made at the conclusion of any accounting period, recording an accrual journal entry with accrued expenses, prepaid expenses, and unearned revenue.
Reversing entry: If you need to cancel entries from the prior accounting period, you must make a reversing entry to keep the books balanced.
Compound entry: Some transactions are more complex, requiring more than two lines for each entry. One example would be a payroll journal entry, which involves multiple deductions, or a depreciation journal entry that takes place over time.

Journal entry example

It can be difficult to conceive what this looks like in practice, so here is a journal entry example to help.

A manufacturing company receives payment from a client for an outstanding invoice.

17/03/21 – Reference Number 1801	Debit	Credit
Revenue (account 1000)	£1200
Accounts Receivable (account 1010)		£1200
To record payment on invoice 521 from Vendor X

By contrast, when the company sent out the invoice one week earlier, the corresponding journal entry would look like this.

10/03/21 – Reference Number 1700	Debit	Credit
Accounts Receivable (account 1010)	£1200
Revenue (account 1000)		£1200
To record invoice 521 for Vendor X

This example shows the two matching journal entries to account for this £1200 transaction, both recording when the invoice was sent out and when the payment was received as revenue.

The type of journal entry will determine where it’s recorded. For example, general transactions like an accrual journal entry or depreciation journal entry will go into the general ledger. No matter the type, they will eventually work their way into financial statements for future analysis. The most important thing to remember is to keep the accounting equation in balance, with equal debit and credit accounts.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.