What Is a Journal Entry in Accounting ?

As a small business owner, keeping accurate financial records is critical to your success. At the heart of your company's accounting are journal entries, which are simply records of all of your business transactions, both debits and credits.

It might sound pretty basic, but these journal entries are the backbone of your company's financial health. Without a proper recording of your business activities, your company could fall apart.

This article will help you understand what a journal entry is and how to make a journal entry as you track your business's sales and purchases.

What Is a Journal Entry in Accounting?

A journal entry is a fairly simple concept: It's a written record of all financial transactions. Any action your company takes that impacts its finances gets compiled in single entries in a ledger.

A common accounting system to record these activities is the double-entry accounting method.

This double-entry system tracks where your money comes from and where it's going. So, each transaction gets two entries — debit and credit — to track where the funds are going and where they're coming from.

The total amount of your debits is recorded on the left side of a transaction record, while the credit entry is recorded on the right side. The sum of the amounts in your debit column should equal the sum of all of your credit records. When these two sums are the same, your journal entry is considered balanced.

Each journal entry typically has columns for you to record the following information:

  • Transaction date: This is the date a transaction takes place.
  • Names of the accounts impacted: To accurately track the movement of funds for your company, be certain to include the accounts your money is being moved to and/or from. Whenever possible, include account numbers.
  • Amounts to be credited and debited: Recording accurate credit and debit amounts in your journal entries are integral to the overall financial health of your business.
  • Reference number that uniquely identifies each transaction: Assign a reference number to each transaction so you can easily locate it in your system.
  • Description of the transaction: You don't need to write an in-depth description, just something that helps you understand what each transaction is for, such as "office supplies" or "catering."

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What Are the Different Types of Accounting Journal Entries?

In addition to general journal entries, there are several other types that you might use to balance your books depending on the type of transaction. Here are some common journal entries you might encounter as you track your business activities.

Compound Journal Entry

A compound journal entry involves more than two accounts impacted during a transaction. This could mean two or more debits, two or more credits, or two or more credits and debits in various accounts.

As an example, imagine you own a construction company and you purchase a new truck for your business that costs around $25,000. Maybe you can make a partial cash down payment, around $5,000, but you need to finance the remaining amount through a bank loan.

In your compound journal entry, you'd credit that down payment to your company's cash account and the financed amount to your loans payable account. The total purchase cost of the truck, $25,000, should be debited from your company's equipment (or comparable) account.

Adjusting Journal Entry

At the end of each accounting period, you'll make adjusting journal entries to your ledger. This means reviewing your original journal entries, which were written in chronological order, to ensure your records match the correct accounting cycles and amounts debited or credited to your accounts.

For example, if you bill a customer in April and mark your entry with a corresponding date but they don't actually pay you until June, you'd need to adjust the date of the entry.

As another example, let's say you own an IT company and you've won a large-scale contract that has you working for another company over several months. You won't see this money until you submit your invoice when the project is completed. You'd go back to adjust your entries to reflect revenue for each month you worked on that project.

Closing Journal Entry

A closing journal entry is made at the end of an accounting period. At the end of this period, you'll review your journal entries and shift the information recorded from temporary accounts to permanent accounts on your balance sheets.

Depending on the transaction, in some cases — including asset accounts, liabilities, and many equity accounts — the balance will roll over to the next accounting period. In other situations, though, such as revenue accounts, expenses, and dividends, closing the entry will bring the balance to zero for the next accounting period.

Reversing Journal Entry

Reversing journal entries are usually made at the start of accounting periods. They're used to cancel out an adjusting entry made in the preceding accounting period. These entries are most commonly used in scenarios when accruals were recorded during an accounting period and you don't want them to remain in your accounting system at the start of a new period. They simplify your company's bookkeeping and reduce the need for compound entries.

As an example, you'd use a reversing journal entry if you rent office space and pay your rent in the middle of each month. If your accounting period ends in December, you'd need to note the final two weeks of the month as accrued rent due to your landlord in your ledger. Then, when you paid your rent on Jan. 15, you'd create a reversing journal entry to balance your accounting.

How Do You Add a Journal Entry Into Your General Ledger?

A general ledger is a master document used to record, store, and track all of your journal entries and business transactions. It provides an accurate view of your company's revenue and expenses and is integral to your success.

Some businesses maintain a physical ledger they update manually, but accounting software like Skynova can automate and simplify the process of recording journal entries. This is especially helpful if you don't have a designated bookkeeper on staff.

Our accounting software makes it easy to record transactions of all kinds — adjusting entries, accrued interest, cash sales, day-to-day expenses, and more. As an example, let's say you have a new expense: You spent about $500 at an office supply store on printer paper.

In our system, you'd select "new expense" if it's the first time you're working with this office supply shop or your first purchase of printer paper. You'll be asked to input the vendor's name, a category for the transaction (in this case, supplies), the amount paid, and how you paid (cash or credit). There's also a section for additional notes related to this journal entry.

Additionally, you'll be asked for three dates: the date you were billed, the due date, and the date you paid your bill. If you purchased your printer paper from a retailer, the date for all three would likely be the same. You'll also have the option of uploading a corresponding receipt for the transaction and tracking whether a bill has been paid.

Make Accurate Journal Entries Using Skynova

The accounting process might sound overwhelming, but Skynova's system makes it easy to organize accurate accounting records for all of your business transactions. Our platform helps you complete all the necessary tasks for ensuring your company's financial success — expense tracking, generating receipts, and operating a general ledger — allowing you to easily input journal entries, producing income statements and balance sheets.

Our accounting software goes hand-in-hand with our other software products and business templates, covering all of your small business's basic needs.

Our software makes creating financial statements and maintaining accounting journals a breeze. Start your free trial of our all-in-one invoicing and accounting system for small businesses today and create your first invoice in seconds.

Notice to the Reader

The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards for journal entries and general ledgers.