Journal entry definition

Journal Entry Overview

A journal entry is used to record a business transaction in the accounting records of a business. A journal entry can be recorded in the general ledger, but sometimes in a subsidiary ledger that is then summarized and rolled forward into the general ledger. The general ledger is then used to create financial statements for the business.

The logic behind a journal entry is to record every business transaction in at least two places (known as double entry accounting). For example, when you generate a sale for cash, this increases both the revenue account and the cash account. Or, if you buy goods on account, this increases both the accounts payable account and the inventory account.

How to Write a Journal Entry

The structure of a journal entry is:

  • A header line may include a journal entry number and entry date.
  • The first column includes the account number and account name into which the entry is recorded. This field is indented if it is for the account being credited.
  • The second column contains the debit amount to be entered.
  • The third column contains the credit amount to be entered.
  • A footer line may also include a brief description of the reason for the entry.

 Thus, the basic journal entry format is:

  Debit Credit
Account name / number
     Account name / number

The structural rules of a journal entry are that there must be a minimum of two line items in the journal entry, and that the total amount you enter in the debit column equals the total amount entered in the credit column.

A journal entry is usually printed and stored in a binder of accounting transactions, with backup materials attached that justify the entry. This information may be accessed by the external auditors as part of their year-end investigation of a company's financial statements and related systems.

Types of Journal Entries

There are several types of journal entries, including:

  • Adjusting entry. An adjusting entry is used at month-end to alter the financial statements to bring them into compliance with the relevant accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards. For example, you could accrue unpaid wages at month-end if the company is on the accrual basis of accounting.
  • Compound entry. A compound journal entry is one that includes more than two lines of entries. It is frequently used to record complex transactions, or several transactions at once. For example, the journal entry to record a payroll usually contains many lines, since it involves the recordation of numerous tax liabilities and payroll deductions.
  • Reversing entry. This is typically an adjusting entry that is reversed as of the beginning of the following period, usually because an expense was to be accrued in the preceding period, and is no longer needed. Thus, a wage accrual in the preceding period is reversed in the next period, to be replaced by an actual payroll expenditure.

In general, do not use journal entries to record common transactions, such as customer billings or supplier invoices. These transactions are handled through specialized software modules that present a standard on-line form to be filled out. Once you have filled out the form, the software automatically creates the accounting record for you. Thus, journal entries are not to be used to record high-volume activities.

Journal entries and attached documentation should be retained for a number of years, at least until there is no longer a need to have the financial statements of a business audited. The minimum duration period for journal entries should be included in the corporate archiving policy.