Every dollar that moves through your business leaves a trail. Journal entries are that trail.
Get them right, and your financial statements tell the truth. Get them wrong, and every report built on them is wrong too.
This guide covers what a journal entry is, how debits and credits work, and 10 worked examples you can follow line by line.
What Is a Journal Entry?
A journal entry is the record of a single business transaction. Each one includes:
- The date
- The accounts affected
- The amount debited and the amount credited
- A short description of what happened
Journal entries follow double-entry bookkeeping. Every transaction touches at least two accounts, and total debits must equal total credits. If they don’t match, something is wrong.
How Debits and Credits Work
Debit and credit don’t mean good and bad. They mean left side and right side.
Whether a debit increases or decreases an account depends on the account type:
| Account type | A debit | A credit |
|---|---|---|
| Assets | Increases | Decreases |
| Expenses | Increases | Decreases |
| Liabilities | Decreases | Increases |
| Equity | Decreases | Increases |
| Revenue | Decreases | Increases |
A quick way to remember it: assets and expenses grow on the debit side. Liabilities, equity and revenue grow on the credit side.
Simple vs. Compound Entries
A simple entry affects two accounts: one debit, one credit. Example: you make a sale and the customer pays cash.
A compound entry affects three or more accounts. Example: payroll, where one paycheck touches wages, tax withholdings and cash at the same time.
Journal Entry Examples
Each example below uses a fictional business, Harbor Design Co. Every entry balances: total debits equal total credits.
1. Cash Sale
Harbor Design completes a project and the client pays $1,200 on the spot.
| Account | Debit | Credit |
|---|---|---|
| Cash | $1,200 | |
| Sales Revenue | $1,200 |
Cash, an asset, goes up, so it’s debited. Revenue goes up, so it’s credited.
2. Sale on Credit
Harbor Design sends Invoice #11910 for $790. The client will pay in 30 days.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $790 | |
| Sales Revenue | $790 |
No cash has changed hands yet. You record what the client owes you, an asset called accounts receivable, and the revenue you earned.
3. Collecting a Customer Payment
Thirty days later, the client pays Invoice #11910.
| Account | Debit | Credit |
|---|---|---|
| Cash | $790 | |
| Accounts Receivable | $790 |
Cash goes up. The amount the client owes you drops to zero. Revenue isn’t touched because you recorded it when you earned it.
4. Buying Supplies on Account
Harbor Design buys $350 of office supplies, with payment due next month.
| Account | Debit | Credit |
|---|---|---|
| Office Supplies Expense | $350 | |
| Accounts Payable | $350 |
Your expense goes up. So does what you owe the vendor, a liability called accounts payable.
5. Paying a Vendor Bill
Next month, Harbor Design pays the $350 bill.
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | $350 | |
| Cash | $350 |
The liability goes away and cash goes down. The expense was already recorded in example 4.
6. Sale With Sales Tax
Harbor Design sells a $1,000 product. The local sales tax rate is 7%, so the customer pays $1,070 in cash.
| Account | Debit | Credit |
|---|---|---|
| Cash | $1,070 | |
| Sales Revenue | $1,000 | |
| Sales Tax Payable | $70 |
This is a compound entry. The $70 isn’t your revenue. You collected it for the state and owe it back, so it’s a liability.
7. Payroll
Harbor Design runs payroll. Gross wages are $10,000. It withholds $1,200 in federal income tax and $765 for the employees’ share of Social Security and Medicare (FICA, 7.65%). Employees receive $8,035 in net pay.
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $10,000 | |
| Federal Income Tax Withholding Payable | $1,200 | |
| FICA Taxes Payable | $765 | |
| Cash | $8,035 |
The business also owes its own matching 7.65% FICA share:
| Account | Debit | Credit |
|---|---|---|
| Payroll Tax Expense | $765 | |
| FICA Taxes Payable | $765 |
Withheld taxes are liabilities until you send them to the IRS. This example leaves out state taxes and federal and state unemployment taxes to keep the math clear. Your payroll will likely include them.
8. Depreciation
In January, Harbor Design bought $12,000 of equipment it expects to use for five years. Using straight-line depreciation with no salvage value, it records $200 of depreciation each month ($12,000 ÷ 60 months).
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | $200 | |
| Accumulated Depreciation – Equipment | $200 |
Accumulated depreciation is a contra-asset account. It reduces the equipment’s book value on the balance sheet without changing its original cost.
9. Accrued Expense
Harbor Design used $400 of utilities in March, but the bill won’t arrive until April. Under accrual accounting, you record the expense in the month you incurred it.
On March 31:
| Account | Debit | Credit |
|---|---|---|
| Utilities Expense | $400 | |
| Accrued Liabilities | $400 |
When you pay the bill in April:
| Account | Debit | Credit |
|---|---|---|
| Accrued Liabilities | $400 | |
| Cash | $400 |
10. Prepaid Expense
On January 1, Harbor Design pays $6,000 for a 12-month insurance policy.
On January 1:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | $6,000 | |
| Cash | $6,000 |
At the end of each month:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $500 | |
| Prepaid Insurance | $500 |
Prepaid insurance starts as an asset because you’ve paid for coverage you haven’t used yet. Each month, $500 of it becomes an expense. For a deeper walkthrough, see Accounting for Prepaid Expenses.
What Is the Purpose of a Journal Entry?
Journal entries are the raw material for your financial statements. Your income statement, balance sheet, and cash flow statement are all built from them.
Accurate entries let you:
- See which clients, products and services are profitable
- Know what you owe and what you’re owed
- File taxes with confidence
- Give lenders and investors numbers they can trust
Single-Entry vs. Double-Entry Bookkeeping
Single-entry bookkeeping records each transaction once, usually as cash in or cash out. It can work for a very small, cash-only business.
Double-entry bookkeeping records every transaction in at least two accounts. It’s required for accrual accounting and for financial statements prepared under GAAP. Most accounting software uses double-entry behind the scenes.
Journals vs. Ledgers
A journal records transactions in date order, with full detail. A ledger sorts those same transactions by account, so you can see the running balance of cash, receivables, payables and every other account.
Entries go into the journal first. Then they’re posted to the general ledger.
Many businesses also use special journals for high-volume transactions:
- Sales journal: sales made on credit
- Purchases journal: purchases made on credit
- Cash receipts journal: all cash coming in
- Cash disbursements journal: all cash going out
- General journal: everything else, including adjusting entries like depreciation and accruals
New to the basics? Start with Bookkeeping 101: Basics for Beginners.
When to Hire a Bookkeeper vs. Doing It Yourself
Software records routine transactions for you. The trouble starts with the entries software can’t guess: accruals, prepaid expenses, depreciation and payroll corrections. One wrong adjusting entry can throw off every report you run.
It may be time for help if:
- You spend more than a few hours a month on your books
- Your accounts haven’t been reconciled in more than a month
- You’re not sure your adjusting entries are right
- You’re switching from cash to accrual accounting
BELAY’s U.S.-based bookkeepers handle your reconciliations, payables, receivables and monthly reporting, so your numbers are right when you need them. See how much a bookkeeper costs or explore BELAY Bookkeeping.
Journal Entry FAQ
What is a journal entry in simple terms?
It’s the record of one business transaction, showing which accounts changed, by how much and on what date.
Do debits always have to equal credits?
Yes. In double-entry bookkeeping, total debits must equal total credits for every entry. If they don’t, there’s an error.
What is an adjusting entry?
An adjusting entry is made at the end of a period to record revenue or expenses in the correct month. Depreciation, accruals and prepaid expenses (examples 8–10 above) are common adjusting entries.
What’s the difference between a journal and a ledger?
A journal lists transactions in date order. A ledger groups them by account and shows each account’s balance.
If I use accounting software, do I still need to know this?
Software creates most routine entries automatically. Adjusting entries often have to be made by hand, and knowing how debits and credits work helps you catch errors before they reach your financial statements.
Get Your Books Right Every Month
BELAY’s U.S.-based bookkeepers keep your entries accurate and your books reconciled.
