Journal entry (definition)
A journal entry is a record of a business transaction in your business books. In double-entry bookkeeping, you make at least two journal entries for every transaction.
Because a transaction can create a lot of changes in a business, a bookkeeper tracks them all with journal entries. A transaction might, for example, affect:
how much cash the business has (revenue or expense)
how much money it owes (liability)
what it owns (assets)
the value of the business itself (equity)
how tax is treated
Each account that’s affected receives its own journal entry.
What goes into an accounting journal entry
Each accounting journal entry should contain the following:
An entry date and reference number that can be used to find the entry later if needed
A column showing what accounts are affected (revenue, expense, liability, asset, equity)
Columns for the debit and credit amounts
A footer line with a brief description of the reason for the entry
Journal entry example
The Cosy Cake Shop bought baking supplies worth £300 on 20 January 2021. The bookkeeper increases the balance of the baking supplies account and decreases the cash account.
Two journal entries show 1) an increase in the baking supplies account and 2) an equivalent decrease in the cash account (the bank account).
Debits versus credits
A journal entry shows when an account balance goes up or down. That change is described as a credit or a debit. The way these terms are used isn’t always intuitive. This table shows what happens when a debit is made and when a credit is made:
The table shows how debit and credit entries increase or decrease the balance of the account they’re made in
How journal entries are made
Journal entries used to be done for every business transaction in separate journals and entered or posted to the relevant accounts in the general ledger at the end of the accounting cycle.
Accounting software now makes the majority of journal entries directly into the general ledger as you receive invoices and reconcile payments using the linked business bank account.
Businesses may still need to make manual journal entries for month-end adjustments, depreciation expenses and transactions that haven’t used the business bank accounts.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
