Definition of a Journal Entry
A Guide to Understanding Journal Entries
A journal entry is the record of a financial transaction entered into a journal. The journal details all the financial transactions of the business and it makes note of which accounts these transactions affected. All journal entries are made using either the double entry or single entry method of bookkeeping.
Journal entries are typically entered in chronological order and debits are entered before credits – debits are entered in a column to the left, and credits are entered to the right. Journal entries are assigned to specific accounts using a chart of accounts, and the journal entry is then recorded in a ledger. The ledger keeps track of multiple accounts.
The Purpose of Journal Entries
Journal entries provide foundational information for all of a business's other financial reports. They're used by auditors to analyze how financial transactions impact a business.
Each entry should include the date of the transaction, the parties involved, a debit from at least one account, a credit to at least one other account, a receipt or check number, and a memo describing other details involved in the transaction – anything you might not be likely to remember months or years later.
If you purchase and use accounting system software, it will most likely take care of all these details for you. But you should be able to handle your journal entries and ledger yourself with some basic understanding of the process if you don't think that kind of expense is necessary quite yet because you're just starting out.
Single Entry Accounting
As the name suggests, each journal entry is made on its own separate line when you use the single entry method of bookkeeping. You might subtract what you spend on a new computer system as a debit, then, on the next line and as another entry, you might income received from a customer or client as a credit. You'll have two separate transactions or journal entries, each with its own line. It's simple, not much different from how you would keep track of transactions you make from your checking account.
Single entry accounting may be appropriate if you run your own small business as a sole proprietor and your books and transactions are not complex. Anyone can handle it. You don't need any specific training.
Double Entry Accounting
A journal entry using the double entry method of accounting includes a variety of information in various columns on the same line. In a double entry system, you might have a debit for the computer purchase, then a credit or increase to your overall office equipment expenses would appear on the same line but in a different column to offset the debit. These columns should be equal, such as -$2,000 as the debit and +$2,000 for the credit.
You might have to use even more columns depending on the nature of your entry, but at a minimum, there should be two, one each for debits and credits. Double entry accounting typically makes a journal entry, not for the transaction itself, but for the account, it affects assets, liabilities, equity, revenue, and expenses. Debits and credits to each are all noted on the same line.
At the end of the year or any other accounting period you select, all your journal entries for debits should correspond to an equal your journal entries for total credits. This means your account is "balanced."