What Is a Journal Entry in Accounting?
Learn the essential initial step in accounting: systematically capturing every financial event to build accurate financial records.
A journal entry serves as the initial written record of any financial transaction that occurs within a business. It captures the details of an economic event, such as a sale, purchase, or payment, directly as it happens. This fundamental record forms the basis for all subsequent accounting processes, ensuring that every financial activity is systematically documented. The information contained in these entries is later used to create financial statements, providing a comprehensive overview of a company’s financial health.
The Foundation: Debits and Credits
Understanding debits and credits is foundational to grasping how financial transactions are recorded in accounting. These terms do not imply “good” or “bad” but rather indicate the side of an account where an entry is made. In the double-entry accounting system, every transaction impacts at least two accounts. This ensures that the accounting equation—Assets = Liabilities + Equity—remains balanced after each transaction.
Debits increase asset and expense accounts, while they decrease liability, equity, and revenue accounts. For instance, when a business receives cash, an asset, the cash account is debited to show an increase. Conversely, credits increase liability, equity, and revenue accounts, and they decrease asset and expense accounts. When a business earns revenue, the revenue account is credited to reflect the increase in income.
For example, if a company purchases supplies with cash, the Supplies account (an asset) would be debited, and the Cash account (also an asset) would be credited. Both sides of the transaction are recorded with equal amounts, ensuring the accounting records remain in equilibrium.
Constructing a Journal Entry
Constructing a journal entry involves following a standardized format to ensure clarity and consistency in financial record-keeping. Each entry begins with the date on which the transaction occurred, establishing a chronological record. Following the date, the specific accounts affected by the transaction are listed. The account being debited is always listed first and positioned at the left margin.
Immediately below the debited account, the account being credited is listed, typically indented to the right to visually distinguish it. The monetary amount for the debit is entered in a dedicated debit column, and the corresponding credit amount is placed in a separate credit column. It is a fundamental rule that the total debit amount must always equal the total credit amount for every journal entry, adhering to the double-entry system.
A concise description of the transaction is then provided below the credited account. This explanation clarifies the nature of the economic event, making the entry understandable to anyone reviewing the accounting records. The consistent application of this format is crucial for maintaining accurate general ledger records.
Illustrative Journal Entry Examples
Recording a cash sale of goods involves increasing the Cash account and the Sales Revenue account. For instance, if a business sells goods for $500 cash on August 1, 2025, the Cash account, an asset, is debited for $500. Simultaneously, the Sales Revenue account, a revenue account, is credited for $500, reflecting the income generated from the sale. The description would note the cash sale of merchandise.
When a business purchases supplies on credit, it impacts an asset and a liability. If supplies costing $200 are purchased on August 2, 2025, from a vendor on account, the Supplies account, an asset, is debited for $200. Concurrently, the Accounts Payable account, a liability, is credited for $200, recognizing the obligation to pay the vendor in the future. The description would indicate the purchase of supplies on credit.
Paying an expense, such as rent, reduces cash and increases an expense. On August 3, 2025, if a business pays $1,000 for its monthly rent, the Rent Expense account is debited for $1,000. In turn, the Cash account, an asset, is credited for $1,000. The entry description would simply state the payment for monthly office rent.