What is a Journal Entry? A Complete Guide for Accounting & Finance

Remember "What is a journal entry?" from Accounting 101? Consider this your refresher—we'll revisit the fundamentals you likely already know inside and out.

But we won't stop there. This guide will also show you how to elevate your accounting practice with financial automation solutions that eliminate manual data entry, transaction processing, and reconciliation. From foundational concepts to game-changing efficiency, we'll cover everything you need to streamline your journal entry workflow.

What Is a Journal Entry in Accounting?

A journal entry is a record of a business transaction in your accounting system. The double entry accounting system is the standard method for recording transactions, ensuring that every entry includes both a debit and a credit so that your books remain balanced.

Journal entries are first recorded in the general journal, which captures all business transactions in chronological order, before being posted to the appropriate general ledger account.

Journal entries serve as the financial DNA of your organization, creating an auditable trail of every transaction, from a $5 office supply purchase to a million-dollar contract. They allow you to track money flowing in and out of your business, maintain accurate books, generate reliable financial statements, comply with accounting standards, and make informed decisions based on real data.

You’ll find journal entries stored in your general ledger (the master record of all company transactions) or in subledgers—specialized ledgers for specific areas like accounts receivable, accounts payable, or inventory.

Accuracy isn’t optional when it comes to journal entries. They directly feed into financial statements that executives, investors, lenders, and regulators rely on to assess your company’s health. Inaccurate entries don’t just create accounting headaches—they can lead to flawed business decisions, compliance issues, and loss of stakeholder trust. Each journal entry corresponds to one discrete business transaction and is eventually posted to the general ledger. Timely entries are crucial because the information from journal entries is used to determine a company's tax liability, making it extremely important that they be both timely and accurate. That’s why maintaining precise, up-to-date journal entries is foundational to sound financial management.

Accounting Equation and Journal Entries

The accounting equation—Assets = Liabilities + Equity—is the foundation of all accounting systems. Every journal entry you make is designed to keep this equation in perfect balance. When a financial transaction occurs, it impacts at least two accounts, and the journal entry must reflect these changes accurately. For example, if your business purchases office supplies with cash, you increase your asset account (office supplies) and decrease your cash account.

The journal entry would debit the office supplies account and credit the cash account, ensuring that the total value of your assets remains equal to the sum of your liabilities and equity. By carefully recording journal entries in this way, you maintain the integrity of your accounting records and ensure that your books always balance.

How to Write a Journal Entry (With Examples)

Creating a journal entry follows a straightforward process, but precision is critical. Every entry must maintain the fundamental rule of double-entry accounting: debits must equal credits. Here's how to record transactions correctly.

Start by identifying the accounts affected by your transaction. Ask yourself: what's coming in, and what's going out? Every business transaction impacts at least two accounts. Next, determine whether each account should be debited or credited based on the account type and the nature of the transaction. Then record the date, account names, amounts, and a brief description of the transaction.

The standard journal entry format looks like this:

Notice that debits appear on the left and credits on the right. The total debits must always equal the total credits—this is non-negotiable.

Let's look at a practical example. Suppose your company purchases $2,000 worth of office supplies with cash on January 15, 2025. Here's how you'd record it:

In this entry, your Office Supplies account increases (debited) because you gained assets, while your Cash account decreases (credited) because you spent money. Both sides equal $2,000, keeping your books balanced.

Here's another example: your business receives $5,000 from a client for services rendered on February 3, 2025:

Your Cash account increases (debited), and your Service Revenue increases (credited). The entry is balanced, and your financial records accurately reflect the income.

Understanding Debits and Credits in Journal Entries

Double-entry accounting requires every transaction to appear in at least two accounts—and for debits to equal credits. It sounds straightforward, but the rules can feel counterintuitive at first. Let's break it down.

Everything starts with the fundamental accounting equation:

Assets = Liabilities + Owner's Equity

Think of this equation as a seesaw that must always stay balanced. Debits sit on the left side, credits on the right. The key to understanding debits and credits is knowing how they affect different account types.

For asset accounts (the left side of the equation), a debit increases the balance and a credit decreases it. For liability and equity accounts (the right side), it's reversed: a credit increases the balance and a debit decreases it.

Revenue and expense accounts follow similar logic. Since revenue increases equity, credits increase revenue accounts. Since expenses decrease equity, debits increase expense accounts.

Here's a complete breakdown of how debits and credits affect each account type:

As transactions pile up, manually tracking debits and credits across multiple accounts becomes increasingly complex—and prone to error. This is where accounting automation solutions prove invaluable. Modern platforms can manage journal entries and account reconciliations automatically, ensuring every entry is properly recorded and balanced. The result? Greater accuracy, less manual work, and more confidence in your financial statements at every close period.

Types of Journal Entries Explained

Not all journal entries are created equal. While they all follow the same double-entry format, different types serve specific purposes in your accounting system. Understanding these distinctions helps you maintain accurate records and comply with accounting standards.

• Adjusting entries occur at the end of each accounting period during financial close. Their purpose is to ensure your financial statements comply with accounting standards like Generally Accepted Accounting Principles (GAAP) by recognizing revenue and expenses in the correct period. Adjusting entries typically address accrued expenses (costs incurred but not yet paid), unearned revenue (payments received before services are delivered), prepaid expenses (payments made in advance), and accrued income (revenue earned but not yet received). For example, if you've used utilities all month but haven't received the bill yet, you'd create an adjusting entry to record the expense in the correct period.
• Compound entries involve more than two account lines in a single journal entry. These appear when transactions affect multiple accounts simultaneously. Payroll is a classic example—a single payroll run might involve gross wages, federal tax withholding, state tax withholding, Social Security, Medicare, retirement contributions, and net pay. Rather than creating separate entries for each component, a compound entry captures the entire transaction in one comprehensive record.
• Reversing entries cancel out journal entries made in a prior accounting period that are no longer needed. They're typically used at the beginning of a new period to undo temporary adjusting entries from the previous period. A common example: you accrue $5,000 in wages at month-end because employees haven't been paid yet. When you process payroll in the new period, you reverse the accrual and record the actual payment. This prevents double-counting the expense.
• Closing entries transfer temporary account balances (revenue, expenses, and dividends) to permanent accounts at the end of an accounting period. This zeros out your income statement accounts and prepares your books for the next period. Without closing entries, last year's revenue would incorrectly carry over into the new year.

Manually reversing entries carry significant risk. Tracking down the original entry details—account numbers, amounts, dates—creates opportunities for error. Input one wrong digit, and you've created a new problem instead of fixing the old one. This is why many organizations turn to automation solutions for journal entry management. Automated systems eliminate the guesswork, ensure accuracy, and handle complex reversing entries without the risk of human error.

Journal Entry Examples in Business Accounting

Real-world transactions come in all shapes and sizes. Here are five common journal entries you'll encounter in everyday business accounting:

• Purchasing inventory on credit – Your company orders $15,000 worth of inventory from a supplier with 30-day payment terms. You debit Inventory (increasing your assets) and credit Accounts Payable (increasing your liabilities). The entry reflects that you've received goods but haven't paid cash yet.
• Recording a cash sale – A customer pays $3,000 cash for your products. You debit Cash (increasing your assets) and credit Sales Revenue (increasing your income). This straightforward entry captures immediate revenue and the corresponding cash inflow.
• Paying employee salaries – Your monthly payroll totals $50,000, with $8,000 withheld for taxes and benefits. You debit Salary Expense for the full $50,000, credit Cash for the net pay of $42,000, and credit various liability accounts (Payroll Tax Payable, Benefits Payable) for the $8,000 in withholdings. This compound entry captures all payroll components in one transaction.
• Recording monthly depreciation – Your $120,000 piece of equipment depreciates at $1,000 per month. You debit Depreciation Expense (increasing expenses) and credit Accumulated Depreciation (reducing the asset's book value). This adjusting entry spreads the equipment's cost over its useful life.
• Receiving payment from a customer – A client pays their $7,500 outstanding invoice. You debit Cash (increasing assets) and credit Accounts Receivable (decreasing assets). The entry shows that money previously owed has been converted to cash on hand.

Common Mistakes to Avoid in Journal Entries

Even experienced accountants make journal entry errors, but knowing the most common pitfalls can help you avoid costly mistakes:

• Unbalanced entries – The most fundamental error is recording entries where debits and credits don’t balance. Every transaction must have equal debits and credits, no exceptions.
• Wrong accounting period – Posting transactions to the incorrect period distorts financial statements and creates compliance issues. Always verify the transaction date matches the period you’re recording it in, and ensure each entry is recorded in the correct accounting period for accurate financial reporting.
• Inadequate documentation – Vague descriptions like “misc expense” or “adjustment” create audit headaches and make tracking errors nearly impossible. Every entry needs a clear, specific description that someone unfamiliar with the transaction could understand.
• Incorrect account classification – Recording a capital expense as an operating expense, or misclassifying other transaction types, can significantly misrepresent your financial position and mislead stakeholders.
• Transposition errors – Writing $1,450 instead of $1,540 might seem minor, but these number reversals compound quickly and throw off your entire accounting system. Double-check amounts before finalizing entries, especially for large transactions.
• Failing to reverse accruals – Forgetting to reverse accruals from the previous period leads to double-counting expenses or revenue, creating inaccurate financial reports.
• Lack of timely entries and tracking – Failing to make timely entries can result in outdated or inaccurate financial statements and compliance issues. Tracking journal entries, especially with accounting software, enhances audit readiness and accuracy as transaction volume grows.

The best defense? Implement a review process where a second set of eyes checks entries before posting, reconcile accounts regularly to catch errors early, and leverage accounting automation software that flags imbalanced entries, enforces consistent classification rules, and simplifies tracking journal entries. Automating journal entry processes can also reduce preparation time and increase visibility for easier audits.

How Automation Can Improve Journal Entry Accuracy

Manual journal entry processes are vulnerable to the same simple mistakes that plague text messages—one wrong keystroke and your numbers are off. Transpose two digits, misplace a decimal, or accidentally skip a line, and suddenly your books don’t balance. The more transactions your business handles, the more opportunities for these errors to creep in. Here are the benefits you stand to gain from automation:

• Eliminates human error – Automation centralizes all financial data in a single location and pulls it directly from the source—whether that’s bank statements, invoices, or uploaded spreadsheets. Instead of manually typing each figure, the system captures and records data automatically, dramatically reducing transcription errors and ensuring consistency across all entries. Accounting software can also automatically generate and manage corresponding journal entries for each transaction, further reducing the risk of mistakes.
• Removes key person dependency – When journal entries rely on one or two specific team members, their absence—whether due to vacation, illness, or turnover—can bring financial processes to a grinding halt. Automated systems maintain continuity regardless of staffing changes, ensuring your accounting operations never skip a beat.
• Accelerates the close process – Automated journal entries update in real-time, allowing you to complete account close procedures on schedule rather than scrambling at month-end to review stacks of manual entries and reconcile ledgers. Automation can also handle recurring journal entries, such as monthly rent or subscription fees, by templating and scheduling them, which minimizes manual effort and reduces errors. Tracking journal entries through automation not only simplifies the process but also supports audit readiness and enhances accuracy.
• Scales with your business – Financial automation solutions transform journal entry management from a time-consuming, error-prone manual task into a streamlined, reliable process. The result? More accurate books, faster closes, and an accounting team freed up to focus on strategic analysis instead of data entry.

The Bottom Line

Journal entries are the DNA of your accounting system—every financial statement, budget decision, and compliance report traces back to these fundamental records. Get them wrong, and the errors ripple through your entire financial ecosystem. Get them right, and you've built a foundation for accurate reporting, confident decision-making, and sustainable growth.

The traditional manual approach to journal entries—spreadsheets, double-checking, hunting for errors—no longer makes sense in today's fast-paced business environment. It's time-consuming, error-prone, and wastes your accounting team's expertise on data entry instead of strategic analysis.

Financial automation solutions offer a better path forward. By streamlining journal entry creation, eliminating transcription errors, and accelerating your close process, automation transforms one of accounting's most tedious tasks into a seamless, reliable operation. Your team gets more accurate books, faster insights, and the freedom to focus on work that actually moves the business forward.