Journal Entries Explained - Complete Guide with Examples (2023)

Create journal entryis the process of recording and tracking all of the transactions that your business conducts. Journal entries help turn business transactions into useful data.

Want to learn how to properly write journal entries for your business? You are in the right place!

In this guide we cover the following:

• What is a diary entry?
• Why are diary entries so important?
• What belongs in a diary entry?
• What are the different types of journal entries?
• How to use an accounting software to document your journal entries

What is a diary entry?

Journal entries are records of financial transactions going in and out of your business. These transactions are all recorded in the commercial register, the so-calledgeneral journal.

Journal entries are the very first step in theaccounting cycle. The most important thing you need to know about journal entries in accounting is that they all follow the double entry method.

This means that two accounts are affected with every recorded transaction - and thus there is always a debit and credit posting.

Before you dive into the nits and grainsdouble entry bookkeepingand writing journal entries, you should understand why journal entries are so important to a business.

Why are diary entries so important?

Well, for starters, it helps to keep organized records of your transactionsKeep your business information organized. Accountants record data chronologically according to a specific format. This allows them to find information easily and keep an eye out for possible informationbilling error.

Second, journal entries are the first step in the journaling process. So eventually you willneed them to create other degrees. The income statement, the cash flow, the balance sheet, they are all based on the first records of journal entries.

Last,performance measurement. Accountants use financial reports to analyze how transactions affect the business.

What is double entry accounting?

As mentioned above, every transaction changes at least two accounts, one of which is debited and the other credited. This is referred to in accounting asdouble entry bookkeeping.

Double-entry bookkeeping is not as complicated as it sounds. To understand the concept, think of every purchase you've ever made.

Money for a product, right? In accounting parlance, this is a transaction that affects two at onceContent. The cash account that decreases as you pay and the equipment account that increases as you purchase the product.

Simply put, in the business world, money doesn't just appear or disappear. If it goes into one account, it has to come out of another. That's why it's called "double entry".

This is where the concepts fromDebit and Credit Cardscome play

First, let's clear up some common misconceptions.

Debit and Credit Cardsare neither good nor bad. And no, they arenot the same as adding or subtracting.

It's just words that show itduality of financial transactions.

Shortly:Direct Debit is money that goes into an account, whereasCredit is money that is withdrawn from an account.

Here's everything you need to remember:

• A credit is always on theright side of a diary entry. It increases the owner's equity, liabilities and income when credited. It decreases them when they are stressed.
• A direct debit, on the other hand, is always on theleft side of a diary entry. It increases wealth and expenses when charged. It decreases them as they are credited.
• At the bottom of the journal entry should be the debit and credit balancebe equal to each other. If it isn't, double check as you probably made a mistake.

Does all this still sound a bit confusing? Do not worry! We made a cheat sheet so it's easy for you to remember.

Ready to solve an example? Let's take a simple one and explain the process step by step.

Example of double-entry bookkeeping

Let's say the owner of an advertising company decides to invest $10,000 in cash in his business.

There arethree main stepsYou must follow to make the perfect journal entry:

Find out which ones firstaccounts are affected. In this transaction, these are the property account and the owner's equity account.

Now determine which oneItems have been increased or decreased, Andat what time.

Since the owner makes oneinvestment, both accounts will be increased by $10,000. The wealth account will have $10,000 more in cash, while the equity account will have $10,000 more in capital.

Finally we have toTranslate the changes intoDebits and Credits. We learned that charges increase wealth, so cash is charged $10,000. Conversely, the equity of the owner happens. Capital is credited for $10,000.

After this point the hardest work is done. Now only the transaction has to be properly documented.

That's how it's done ...

What belongs in a diary entry?

To create a complete journal entry, you need the following items:

• A reference numberor also known as theJournal entry number, which is unique for each transaction.
• The date of the journal entry.
• The account column, where you enter the names of the accounts that have changed.
• Two separate columns for debit and credit. Here you enter the amounts that are credited and debited. Again, it's important to remember that they must end up being the same. If you use accounting software, you cannot post the journal entry unless the amounts match. However, if you're using manual apps like Sheets or Excel, always triple check the balance.
• Last, the explanation of the diary entry. This must be a brief but accurate description of the journal entry. You may need to refer back to this in the future, so be as clear as possible.

This is what the previous transaction would look like in a journal:

What are the most common types of journals?

Companies are diverse - in size, service, ownership. Because of this, there are different types of journals depending on the business you run. However, we mainly divide them into two categories:general and specific.

We briefly mentioned the General Journal at the beginning. As a reminder, the general journal is the company ledger where accountants post (or summarize) all journal entries.

While small businesses andStartupsmay have no trouble getting all of their entries into the general diary, this is not always the case.

Other trade journals are mentioned for large sectors such as trade or manufacturingspecial magazinesis needed. It is your purposeGroup and record transactions of a specific type.These types depend on the type of business. As a rule, however, special journals record the most frequently recurring transactions within a company.

Here is a list of the most common types of trade journals used by businesses:

• Sales - Income you earn from sales.
• Sales Refund - Loss of income from sales that you have refunded
• Trade accounts receivable – cash owed to the company
• Accounts Payable – Cash owed by the company
• Cash Earnings - Cash you have won
• Purchases - Payments you've made
• Equity - investment of the owner
• Payroll - Payroll transactions such as gross wages or taxes withheld

The most common journal entries for a small business

Some of the most common types ofJournal entries that a small business will makeare the following:

All examples assume taxes are levied on sales and purchases. If there is no tax, it can be removed since the value is zero.

Journal entry for selling services

diary entry forsales invoice- Goods/Inventory

Journal entry for cash sales

Journal entry for receipt of payment for invoice

Journal entry for goods purchase

Journal entry for the purchase of services

Journal entry for payments for purchases

Journal entry only to fulfill orders (transfer of goods/inventory from the system)

Journal entry for goods receipt only (transfer of goods/inventory to the system)

As you might have guessed, a sale of goods journal entry is created when your company sells some finished goods. Since these are self-explanatory enough, let's move on to some more complex accounting journal entries.

What are the different types of journal entries?

There are three other main types of journal entries in accounting:

Compound Entries

For transactionsaffect more than two accounts, we docompound entries. This is common when the recordings are related or happen on the same day.

Remember:Debit and credit must always be the same. The principle remains the same, only more accounts change.

Let's look at an example.

Company XYZ decides to buy new computer software for $1,000. You pay $500 in cash immediately and agree to pay the remaining $500 later.

The steps are the same as for double-entry bookkeeping.

First we find out which accounts have changed and by how much. In this scenario, there are three:

• Asset account that increases by $1,000 when you purchase the new computer software.
• Cash account that deducts $500 in cash from the payment.
• Accounts payable increasing the remaining unpaid amount by $500.

The next step is to convert them into debits and credits.

Assets increase as they are charged, so devices are charged $1,000. The spend decreases as it is credited, so cash is credited for $500. Payable increases when credited, so Accounts Payable is also credited $500.

This is what the transaction wants in a journal:

customize entries

Adjustment bookings take some getting used toUpdate previously recorded journal entries. They ensure that these records correspond to the correct billing periods. However, this does not mean that these transactions will be canceled or deleted. Adjustment bookings arenew transactions that keep the company's finances current.

They are usually madeat the end of a billing period. The billing period usually coincides with the fiscal year.

There are four main types of adjustment transactions:

1. Prepaid Expensesare cash payments for assets not yet used. Think about insurance. It protects a business from potential losses such as fire or theft that have not yet occurred.
2. Unearned earningsIs Cash received before the product or service is provided. Take your annual gym membership or Spotify subscription — you pay upfront for future services.
3. Accrued Revenueis money earned but not collected. When you take out a loan, the interest earned on the loan is recognized as accrued income.
4. Accrued Expensesare expenses made but not paid. An example would be not paying your workers their wages until the end of the month.

Let's put all this information into a concrete exercise.

On October 2nd, you sell a customer a service worth $3,000. You receive payment for the service rendered, but forget to make a journal entry.

Then, at the end of October, compare the actual cash balance with the cash balance shown on the balance sheet.

Since the two totals don't match, it means a transaction is missing somewhere. At this point,You need to make a journal entry adjustment.

The journal entry on October 31st would look like this:

cancel bookings

chargebacks arethe opposite of adjustment postings.When we say the opposite, we don't mean that the customization entries are deleted. No previously recorded amount will change. Chargebacks onlySimplify financial reports, by removing the effect of adjustment transactions.

Since their aim is only to simplify,Chargebacks are optional.Some accountants choose to do this, some don't.

They are usually made inBeginning of a new billing period.

Why?

Adjustment postings are made at the end of the period. For example, if the period ends on December 31st, you would do the opposite on the next day, January 1st.

Now you cannot cancel all types of adjustment bookings: onlyaccrued income and accrued expenses.

Let's see how the previous accrued revenue example would look in reverse.

The customization entry in the last section read:

• Accounts receivable charged $3000
• $3,000 in service revenue credited

What reverse entries do is swap places of the two. So now:

• The service revenue will be charged at $3000
• Claims will be credited with $3000

This is how the complete diary entry would look like:

How to use an accounting software to document your journal entries

Run your own businessbrings with it many challenges. No entrepreneur has time to write down all of their diary entries by hand.

That's why most companies record their bookings with accounting software.

You may be thinking – isn't accounting software just for accountants?

Well, most are, but at Deskera we prioritize small business owners. We've spent over 10 years working with small business owners from over 100 different countries to create aCloud accounting softwarethat fits any type of business.

need to createbills, manage inventory, generate financial reports, track payments, manage dropshipping? You can do all this with Deskera. Our program is specially designed for you to easily manage and monitor your company's finances.

Here's how you can use Deskera Books to record journal entries.
1. Go toAccounting > Journal Entry.

Here you can view, create and manage all your journal entries.The main attributes displayed here for each entry are the journal number, the journal date, the journal type and the associated voucher number.

To view the details of each journal entry, you can pressExpand All Records button.As you can see,The account name, debit amount, credit amount, and description are all displayed.

2. To create a journal entry manually afterwards, click on the "Create" button in the upper right corner.. You'll notice two journal entry options: regular or bank transfer. Each option depends on the type of entry you are making.

4. Complete all of these fields with the appropriate information and click Save. Ta-da, you made a diary entry!

what if youaccidentally entered the wrong amounts? The software will notice and not save the journal entry. This is what the “unbalanced account” is for at the bottom right of the page. The exact amount outside the account balance is displayed.

Automate the creation of journal entries with accounting software

Businesses have moved beyond the pen and paper age for a reason. Useaccounting softwarelike Deskera helps you to automate the whole process of creating journal entries.

If your businesscreates an invoice, the corresponding journal entry is automatically inserted by the system into the respective general ledger for accounts receivable, sales, sales tax, etc.

Likewise, when a payment is processed, the bank and accounts receivable are automatically adjusted by the accounting software.

Desk, allows you to connect your bank directly and track all expenses automatically. When you make an expense, the journal entry is automatically created and assigned to the correct ledger account.

You can also create custom invoices using the provided templates and send reminders to make sure you don't miss outbill payments.

To top it off, creating financial reports with Deskera is as easy as 1-2-3.

The central theses

I hope our guide to journal entries was helpful!

For a quick recap, let's go through the key points we've covered:

• Journal entries record a company's financial transactions. They are the first step in the billing cycle.
• Each transaction in a journal entry affects two accounts. One of them is debited, the other credited. Simply put, debit is money going into a business, while credit is money going out.
• Never forget:Debit and credit should always be the same in the end.
• To write a journal entry, you need to find out which accounts are affected, which items decrease or increase, and then convert the changes into debits and credits.
• A complete diary entry consists of 6 elements: a reference number, date, account section, debits, credits and a journal statement.
• You can either save these journal entries in aGeneral magazine or a special magazine.
• There are three main types of journal entries:Connection, adaptation and reversal.
• Use accounting software like Deskera to automate the process of creating journal entries and save tons of time!

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