Journal Entry

A journal entry is the way in which a company records all of the individual financial transactions it sends and receives. Put simply, it is the way all transactions are recorded for accounting purposes.

The journal entry is a fundamental part of accounting and is the first step in the accounting cycle, taking place after every transaction your company makes.

What is a Journal Entry?

Accounting is the process that a business follows to record financial transactions in its books and generate reports. Accounting is based upon a double-entry system.  What does this mean?

Every transaction has two sides to it – a debit and a credit. 

Debits must equal credits.

To illustrate:  If you financed a new car, how would this transaction impact your accounting records?  You now have a $10,000 asset with the car, but you also have a $10,000 loan that you have to pay back.  Using this example, a journal entry is used to show the value of the $10,000 asset as well as the inability of the short-term loan. 

Date Account Number Account NameDebitCredit
1/1/20XX 1601 Vehicle $10,000.00  
1/1/20XX 2101 Vehicle loan payable   $10,000.00
    To record the purchase and financing of a new car    

The double entry system helps to ensure that all sides of a transaction are recorded and that your transaction is in balance.  A journal entry is used to ensure that transactions are properly recorded in the accounting books and records of a company.

Components of a Journal Entry

In its truest form, a journal entry includes the following;

  • Date
  • Entry number
  • General ledger account name
  • General ledger account numbers
  • Amounts
  • Description

Journal entries are recorded in what is known as a General Journal.  This is a collection of journal entries that are posted by a business.  Activity that is recorded in the General Journal will then flow through to the company’s General Ledger.  A General Ledger groups all company transactions by account number and in date order. 

Some of the most common ways that a company records a financial transaction on their books are when cash changes hands, such as when a business writes a check to pay a bill or makes a deposit at the bank.

Journal Entry Examples

Making a Deposit

Let’s say that you have a client that runs a restaurant.  They accept both cash and credit cards from customers.  Every day, the restaurant reconciles the sales from the day before.  They add up any cash that they received and prepare a deposit ticket.  This deposit is then taken to the bank. 

What would this transaction look like on your business records?

Entry #1

DateAccount NumberAccount NameDebitCredit
1/1/20XX 1001 Operating Bank Account $1,000.00  
1/1/20XX 4001 Restaurant Revenues   $1,000.00
    To record cash receipts received for meals sold    

Since these meals were paid for in cash, the restaurant was able to take this to the bank and make a deposit.  However, what if the restaurant had patrons that paid for their meals using a credit card?  They don’t have any cash to add up or a physical deposit to make at the bank, yet sales made on a credit card will hit their bank account. 

To properly record restaurant sales paid for by credit cards, the following entries would be made;

Entry #2

DateAccount NumberAccount NameDebitCredit
1/1/20XX 1201 Credit Cards Receivable $2,000.00  
1/1/20XX 4001 Restaurant Revenues   $2,000.00
    To record credit card receipts for meals sold    

Entry #3

DateAccount NumberAccount NameDebitCredit
1/1/20XX 1001 Operating Bank Account $1,940.00  
1/1/20XX 6001 Credit Card Fee Expense 60.00  
1/1/20XX 4001 Credit Cards Receivable   $2,000.00
    To record credit card receipts for meals sold    

You’ll notice that it takes two entries to record sales paid for by a credit card, versus those that are paid for by cash.  What are the differences?

  • No cash changed hands – When a customer pays using their credit card, the business will experience a delay of typically 1 to 3 days before they receive their money.  This delay depends upon the credit card processor and the type of card.   In order to account for this, any anticipated deposits from credit cards are first recorded to a “credit cards receivable” account
  • Credit cards charge a fee – Even when the restaurant does receive their money, it will typically be less than what the patron paid.  This is due to a credit card processing fee that the business is charged.  Rather than receiving a $2,000 deposit, the business will only receive $1,940. 
  • Once the deposit is received, there is no more credit card receivable to show on the books

Paying a Bill

Restaurants often have bills that they need to pay.  They often pay for wages, food, utilities, rent, and insurance.  A restaurant that has to pay for food upon delivery may need to write them a check.  This is what a purchase transaction might look like as a journal entry;

Entry #4

DateAccount NumberAccount NameDebitCredit
1/1/20XX 6001 Food expense $500.00  
1/1/20XX 1001 Operating bank account   $500.00
    To record check #1001 for Pepsi purchase    

In some cases, a restaurant may purchase food on account.  This means that a restaurant can receive the food delivery but pay for it at a later date.  In this case, a food purchase would like this as a journal entry;

Entry #5

DateAccount NumberAccount NameDebitCredit
1/1/20XX 6001 Food expense $500.00  
1/1/20XX 2001 Accounts payable   $500.00
    To record Pepsi invoice #1234    

When the restaurant pays their bill, the journal entry would look like this;

Entry #6

DateAccount NumberAccount NameDebitCredit
1/1/20XX 2001 Accounts payable $500.00  
1/1/20XX 1001 Operating bank account   $500.00
    To record check #1001 – pays Pepsi invoice #1234    
         

In this case, there are two separate transactions that are recorded by a journal entry.  Entry #5 records the delivery of the food and the corresponding amount that will be due in the future.  Entry #6 reflects the actual check payment being made toward the open Pepsi invoice.  

Journal Entries and Accounting Software

Many accounting software packages on the market today take care of the double-entry process in the background.  For example, a restaurant using accounting software would only need to post, or record, the Pepsi invoice into the system.  They can then print a check to pay the open bill by selecting that invoice for payment.  No journal entry is required because the accounting software automatically posts both sides of the transaction to the general ledger.

Journal Entry Best Practice

Best practices to follow when you are recording a journal entry on the books;

  • Remember – debits increase assets and expenses and credits increase liabilities, equity, and revenue
  • Journal entries have to balance – that is, debits must equal credits
  • Double-check your entries – make sure that your debits and credits are correct and that you’ve chosen the right account numbers
  • Write clear descriptions

Journal entries are used throughout the accounting cycle.  They are used to record the financial impact of events that occur in a business.