What are journal entries?
Journal entries are how you record transactions day-to-day. They’re key to making sure your books are accurate and up to date. Think of them like rough notes you keep about your finances. Your general ledger is the final draft you prepare later.
What are journal entries for?
Once transactions are entered in your accounting journals, they’re posted to your general ledger. Think of “posting” as “summarizing.” By summarizing all your journals, the general ledger lets you see, at a glance, how your business is performing.
On top of that, the information recorded in your journals and the general ledger is used to prepare financial statements—the income statement, balance sheet, and (depending on what type of accounting you use) cash flow statement.
Financial statements are the key to tracking your business performance and accurately filing your taxes.
Double entry journal
There are two methods of bookkeeping (and therefore, two methods of journal entry): single, and double-entry. The most common form of bookkeeping today is double entry. We’ll be using double entry examples to explain how journal entries work.
If you’re totally new to double entry, and you don’t know the difference between debits and credits, pause here. Then check out our visual guide to debits and credits. It’ll teach you everything you need to know before continuing with this article.
Examples of common journals
The precise journals you use for your bookkeeping will depend on what kind of business you run. Broadly, they’re split into two categories: The general journal, and the special journals.
The general journal contains entries that don’t fit into any of your special journals—such as income or expenses from interest. It can also be the place you record adjusting entries.
The special journals, also referred to as accounts, are used to record the common, day-to-day transactions of your business. All of your special journals are listed in your chart of accounts. Common examples include:
- Sales, income you record from sales
- Accounts receivable, money you’re owed
- Cash receipts, money you’ve received
- Sales returns, sales you’ve refunded
- Purchases, payments you’ve made
- Accounts payable, money you owe
- Equity, retained earnings and owners’ investment
Example of a journal entry
Here’s an example of what one journal entry could look like. Let’s say a client just paid the $600 invoice you sent them:
|Nov. 3/19||Invoice #123||$600|
Date lets you know when the entry was recorded.
Description includes relevant notes—so you know where the money is coming from. In this case, it’s the invoice number.
Debit notes that $600 is being added to Cash.
Credit notes money leaving cash. In this case, there’s no money being paid out.
At the same time you make this entry, you’d make another in accounts receivable (money clients owe you):
Accounts Receivable Journal
|Nov. 3/19||Invoice #123||($600)|
The money is being removed from accounts receivable—your client doesn’t owe you $600 any more, it’s being put in cash—so it’s listed as a credit.
Closing accounting entries
At the end of the financial year, you close your income and expense journals—also referred to as “closing the books”—by wiping them clean. That way, you can start fresh in the new year, without any income or expenses carrying over.
You can’t just erase all that money, though—it has to go somewhere. So, when it’s time to close, you create a new account called income summary, and move the money there.
Here’s a simplified example of how that might look.
First, credit all the money out of your asset accounts. In this example, that consists only of cash:
Sales Revenue Journal
|Dec. 31/19||Year Total||$12,000|
Close Income Accounts to Income Summary
Then, credit all of your expenses out of your expense accounts. For the sake of this example, that consists only of accounts payable.
|Dec. 31/19||Year Total||($3,000)|
Close Expense Accounts to Income Summary
After we do that, the income summary journal looks like this:
Income Summary Journal
|Dec. 31/19||Income Total||$12,000|
Adjusting journal entries
If you use accrual accounting, you’ll need to make adjusting entries to your journals every month.
Adjusting entries ensure that expenses and revenue for each accounting period match up—so you get an accurate balance sheet and income statement. Check out our article on adjusting journal entries to learn how to do it yourself.
Some business owners love making journal entries. Most don’t. If you fall into the second category, let Bench take bookkeeping off your hands for good.
A Beginner's Guide to Stress-Free Bookkeeping
Bookkeeping is tedious. But it doesn’t have to be. Here’s a stress-free guide to doing your own bookkeeping (that you’ll actually want to read).