What Is a Journal Entry? How To Record Debits and Credits

Small business owners and entrepreneurs need to keep accurate records of every financial transaction. This is where journal entries come in: They’re the foundation of accounting. A journal entry consists of at least one debit and one credit entry, a brief description of the transaction, and the accounts affected. Learn more about journal entries and how to set up a system to track and manage them.

What is a journal entry in accounting?

• Opening journal entry
• Compound journal entry
• Adjusting journal entry
• Closing journal entry
• Reversing journal entry

In accounting, a journal entry is the first step in the accounting cycle that details which accounts are affected by a transaction and by how much, and whether they are debited or credited.

This recordkeeping is part of the double-entry accounting system, which is commonly used and is the core principle of modern accounting. This system states that every financial transaction has two or more equal and opposite effects on at least two different accounts. Every debit has a corresponding credit of an equal amount. This inherent balancing mechanism is a reflection of the fundamental accounting equation as follows:

Assets = Liabilities + Equity

These elements, which reflect a company’s financial position at some specific point in time, are listed on the business’s balance sheet and must always be equal. The double-entry method significantly reduces errors and offers a complete picture of each transaction’s impact.

These are the common types of journal entries you’ll encounter as a business owner:

Opening journal entry

This is the very first entry made when a business opens, or at the beginning of a new accounting period. Opening entries establish the internal financial position by showing existing assets (such as cash or equipment), liabilities (such as loans), and equity (such as the owner’s initial investment).

Compound journal entry

When a single transaction affects more than two accounts, involving multiple debits, and/or multiple credits, it is a compound journal entry. An example might be purchasing equipment (assets) with a down payment (cash) and the rest on credit (accounts payable), affecting three accounts.

Adjusting journal entry

Made at the end of an accounting period, an adjusting journal entry ensures that all revenue earned and expenses incurred during that period are accurately reflected on the financial statements, no matter when cash was exchanged. Examples include recording depreciation, accrued expenses (like utility bills not yet paid), or unearned revenue that has now been earned after a business delivers a product or service.

Closing journal entry

This journal entry is made at the very end of an accounting period to transfer the account balances of temporary accounts (revenue, expenses, and owner’s draws or dividends) to permanent accounts, typically to the owner’s equity account. This effectively “closes out” the temporary accounts, returning them to zero for the start of the next accounting period, so the new period’s performance can be measured independently.

Reversing journal entry

A reversing journal entry is an optional entry that is made at the beginning of a new accounting period specifically to reverse certain adjusting entries from the previous period. They are used to simplify the recording of routine, recurring business transactions by avoiding the need for a complex adjusting journal entry in the new period.

How debits and credits work across account categories

• Assets
• Liabilities
• Equity
• Income
• Expenses

In the double-entry accounting method, debits and credits are the two components of every journal entry, representing the opposing sides of a financial transaction. They are not synonymous with “increase” or “decrease” in a general sense; rather, their effect depends entirely on the type of account they are impacting.

The core concept remains balance: For every transaction, the total value of debits recorded must always equal the total value of credits recorded. This is the golden rule of double-entry accounting. To truly master a journal entry, it’s important to understand the rules of debits and credits for each major account category:

Assets

Assets are resources owned by the business that have future economic value (e.g., cash, accounts receivable, inventory, equipment, buildings).

• Increases in assets are recorded with a debit

• Decreases in assets are recorded with a credit

Liabilities

Liabilities are obligations or debts owed to outside parties (e.g., accounts payable, loans payable, unearned revenue).

• Increases in liabilities are recorded with a credit.

• Decreases in liabilities are recorded with a debit.

Equity

Equity represents the owner’s claim on the assets of the business after all liabilities are paid (e.g., owner’s capital, retained earnings, owner’s draw).

• Increases in equity are recorded with a credit.

• Decreases in equity are recorded by debit.

Income

Income, or revenue, involves increases in assets or decreases in liabilities (e.g., sales revenue, service revenue, interest income).

• Increases in income are recorded with a credit.

• Decreases in income are recorded with a debit.

Expenses

Expenses are costs incurred in the process of earning revenue (e.g., rent, utilities, salaries, cost of goods sold).

• Increases in expenses are recorded with a debit.

• Decreases in expenses are recorded with a credit.

Format of a journal entry

A standard journal entry includes several elements to ensure clarity. Adhering to this format makes it easier to read, understand, and post entries to your ledger.

• Date. The exact date the transaction occurred.

• Account titles. The precise names of the accounts being debited and credited. The debited accounts are listed flush with the left margin, followed by the credited account, which is typically indented to visually distinguish it.

• Reference number. This column is typically left blank during the initial process of entering the journal entry. It’s filled in later with a ledger account number or code once the entry has been transferred from the journal to the respective general ledger accounts. The reference number provides a cross-reference, creating a complete audit trail.

• Debit amount. The monetary value being debited from the account, always placed in the debit column.

• Credit amount. The monetary value being credited to the account, always placed in the credit column.

Here’s the typical format of a properly documented journal entry:

How to write a journal entry

1. Identify the transaction and date
2. Determine which accounts are affected
3. Classify the affected amounts
4. Apply debit and credit rules
5. Record the accounting journal entries

Writing accurate journal entries is an important skill for any business owner, and it becomes intuitive with practice. Here are the steps:

1. Identify the transaction and date

The first step is to determine what financial event has occurred. What was the core activity? Was it a sale, a purchase, a payment, a receipt, or something else? Also, pinpoint the correct date of the transaction. This is necessary for maintaining a chronological record and for accurate reporting periods. For example, did a customer pay you for an order, or did you pay your monthly internet bill?

2. Determine which accounts are affected

Every financial transaction, by definition, affects at least two accounts. Consider the direct consequence of the transaction. If you made a sale for your cash account, “Cash” is affected (you received it) and “Sales revenue” is affected (you earned it). If you paid your rent, the cash account is affected (it decreased) and “Rent expense” is affected (it increased). Identify all the accounts that have changed as a result of the event.

3. Classify the affected amounts

Once you’ve identified the accounts, classify each one as an asset, liability, equity, revenue, or expense. This classification is the key to knowing whether to debit or credit them.

4. Apply debit and credit rules

Then you can apply the rules of debits and credits to the journal entry:

• Expense and asset accounts. Increase with a debit, decrease with a credit.

• Liability, equity, and revenue accounts. Increase with a credit, decrease with a debit.

Always ensure that the total debits for the transaction are equal to the total credits. This is your internal check for accuracy.

5. Record the accounting journal entries

Using the standard journal entry format (date, account titles, debit, credit), formally record the journal entries.

1. Enter the date of the journal entry.

2. List the account(s) to be debited first, along with their respective amounts in the debit column.

3. Then, list the account(s) to be credited with their respective amounts in the credit column.

4. Finally, write a concise description that clearly explains the nature of the transaction. This narration should be brief but descriptive enough for anyone reviewing the entry to understand what occurred without needing additional information.