Journal Entries Explained with Examples
Table of Contents
- What is a Journal Entry?
- What is the Purpose of a Journal Entry?
- Examples of Journal Entries
- When to Hire a Bookkeeper vs. Doing It Yourself
Bookkeeping journal entries track your business' financial transactions with entries to specific accounts using a debit and credit system.
Every entry represents a different transaction, and every accounting system has a chart of accounts that lists accounts as correlating categories.
These entries are one step in the accounting cycle that lead to the preparation of meaningful financial statements and are a key component of both bookkeeping and accounting functions.
Think of it as a detailed filing system, recorded either by hand or using software.
What is a Journal Entry?
Journal entries are, at their simplest, a daily record of every business transaction and event in your company books.
Journal entries recorded will include the following:
- the date
- the account(s) and amount(s) that will be debited
- the account(s) and amount(s) that will be credited
- a short description or note
At least two accounts are needed for every transaction – so at least one is debited and at least one is credited.
Debits and credits are opposite entries that must equal one another, so your debit column total must be the same as your credit column total.
When you debit an account, you need to credit another account – and vice versa – so debits and credits oppositely affect your different types of accounts.
To further simplify these entries …
Debits increase asset and expense accounts. They decrease liability, equity, and revenue accounts.
Credits increase liability, equity, and revenue accounts. They decrease asset and expense accounts.
See? Opposites. Easy enough, right?
Here are some general rules about debiting and crediting.
- Expense accounts are debited and have debit balances.
- Revenue accounts are credited and have credit balances.
- Asset accounts normally have debit balances.
- To increase an asset account, debit the account.
- To decrease an asset account, credit the account.
- Liability accounts normally have credit balances.
- To increase a liability account, credit the account.
- To decrease a liability account, debit the account.
What Are Simple & Compound Entries?
Armed with an understanding of what journal entries are, let’s dive in a little deeper – but we promise you’re ready.
You’ll likely need to make both simple and compound entries when you manage your bookkeeping.
What Is A Simple Entry?
Simple entries are used to record a transaction that only affects two accounts and only deal with one debit and one credit.
Here are a few examples of when to use simple entries:
- Making a sale on credit
- Transferring money between accounts
- Making a purchase
- Refunding customers
What Is A Compound Entry?
Compound journal entries involve more than two accounts and have two or more debits, credits, or both.
Here are some examples of when to use compound entries:
- Recording credit card transactions
- Making multiple petty cash purchases
- Creating a payroll journal entry
- Accounting for sales tax
What Is The Purpose of a Journal Entry?
Journal entries matter because keeping a record of all of your company’s financial events will help you eventually create a full set of accurate financial statements.
But we really liked how it was explained here:
“An easy way to understand journal entries is to think of Isaac Newton’s third law of motion, which states that for every action, there is an equal and opposite reaction.
“So, whenever a transaction occurs, there must be at least two accounts affected in opposite ways.
“For example, if a company bought a car, its assets would go up by the value of the car. However, there needs to be an additional account that changes – ‘the equal and opposite reaction’) – because the other account affected is the company’s cash going down because they used [it] to purchase the car.”
And for business owners, there is the small matter of whether you will elect single- or double-entry bookkeeping.
Single-Entry vs. Double-Entry Bookkeeping
Single-entry is like a check register, where you record transactions as you pay bills and make deposits. This works best for companies that are relatively small with relatively few transactions.
For larger and more complex companies, you need double-entry bookkeeping. Two entries are made for each transaction, one debit and one credit – at a minimum.
With everything documented with journal entries, it’s time for a general ledger.
“Wait. But aren’t journals and ledgers the same?” you challenge.
Fair. They do seem synonymous – but they’re not.
Your transactions are first recorded in journals before they’re transferred to ledgers.
Think of this way: Zoom in with journals to analyze the finer details of your business, and zoom out with ledgers to look at the big picture.
Trees vs. forest – got it?
Examples of Journal Entries
Now, it’s time to choose the right journal for the job.
Because while there are – we hope you’re sitting down – seven types of journals, the five most common ones are the sales journal, purchase journal, cash receipts journal, cash payment journal, and account receivable journal.
- The Sales Journal records credit sales, like customers who bought on credit or account.
- The Purchase Journal records credit purchases by your business, like supplies and equipment.
- The Cash Receipts Journal records all cash inflows, like cash for goods sold or services rendered.
- The Cash Payments Journal records all cash outflows, like – as its name suggests – payments made with cash.
- Account Receivable Journal records all money you’re owed, like what your customers pay you for your goods or services.
Here’s an example of what a cash journal entry would look like:
|April 15, 2021||Invoice #11910||$790|
- Date: When the entry was recorded
- Account Name: Where the money is coming from
- Debit: How much is being added to your cash account
- Credit: How much money is leaving cash
And because we’re using a double-entry system – you’re so smart – this would also need to be recorded in your accounts receivable journal:
|Accounts Receivable Journal|
|April 15, 2021||Invoice #11910||($790)|
And just like that, you’re on your way to squeaky-clean, perfectly recorded books – good for you!
When To Hire A Bookkeeper vs. Doing It Yourself
It can be hard to decide whether you can handle your bookkeeping or whether it’s better left in the hands of a professional.
But listen. You can do this. You can absolutely do your own bookkeeping.
But there may come a time where your business outgrows your skills. Or when you reach the point where handling your own bookkeeping isn’t the best use of your time.
Your finances are not the place to be experimenting, holding your breath, fingers crossed and hoping for the best.
So if you are one day ready to wave the white flag on handling your red and black margins, let one of BELAY’s experienced remote bookkeepers help.
You’ll regain your peace of mind – and wonder why you waited so long.
Related BELAY article: Bookkeeping 101: Basics for Beginners