What is a Journal Entry?
A journal entry is the first formal record of a business transaction, written in the general journal before it's posted to the ledger. Every entry lists the date, the accounts debited and credited, the amounts, and a short explanation.
A journal entry is a chronological record of a transaction showing which accounts are debited and credited, following the rule that total debits must equal total credits.
- 1↓Identify the transactionDetermine what happened and which source document supports it (invoice, receipt, contract).
- 2↓Determine accounts affectedDecide which two or more accounts change as a result of the transaction.
- 3↓Apply debit/credit rulesUse the rules for assets, liabilities, equity, revenue and expenses to decide which account is debited and which is credited.
- 4↓Record in the journalWrite the date, debit account and amount first, then the credit account and amount indented below.
- 5Add a brief explanationNote the reason for the entry so it can be understood later without the source document.
Step-by-step worked examples
On July 1, a company buys office supplies for $600 cash. Record the journal entry.
Supplies (asset) increases → debit Supplies $600 Cash (asset) decreases → credit Cash $600 Jul 1: Dr. Supplies $600 / Cr. Cash $600
On July 5, a company provides $2,500 of services on credit to a client.
Accounts Receivable (asset) increases → debit Accounts Receivable $2,500 Service Revenue increases → credit Service Revenue $2,500 Jul 5: Dr. Accounts Receivable $2,500 / Cr. Service Revenue $2,500
On July 10, the owner invests $10,000 cash into the business.
Cash (asset) increases → debit Cash $10,000 Owner's Capital (equity) increases → credit Owner's Capital $10,000 Jul 10: Dr. Cash $10,000 / Cr. Owner's Capital $10,000
Flashcards
Quick quiz
Q1.In a journal entry, which account is listed first?
Q2.A company pays $400 cash for utilities. What is the correct entry?
Q3.What rule must every journal entry satisfy?
Q4.A business receives $3,000 cash for a loan from the bank. What's the entry?
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Common mistakes
Recording only the debit or only the credit side. — Correct: Every journal entry needs at least one debit and one credit, and they must be equal.
Listing the credit account before the debit account. — Correct: Standard format lists the debit account and amount first, then the indented credit account.
Skipping the explanation line. — Correct: A short memo helps anyone auditing the books later understand the transaction's purpose.
Assuming a journal entry is the same as posting to the ledger. — Correct: The journal entry is the first record; posting later transfers it into the appropriate ledger accounts.
FAQ
What is a journal entry in accounting?
The first, chronological record of a business transaction, showing which accounts are debited and credited.
What is the format of a journal entry?
Date, debit account and amount, then credit account (indented) and amount, followed by a brief explanation.
What are examples of journal entries?
Buying supplies for cash, billing a client on credit, or an owner investing cash are all recorded as journal entries.
How do you calculate a journal entry?
Determine the accounts affected, apply debit/credit rules for each account type, and ensure total debits equal total credits.