What is a journal entry?
Journal entries are how transactions get recorded in your company’s books on a daily basis. Every transaction that gets entered into your general ledger starts with a journal entry that includes the date of the transaction, amount, affected accounts, and description. The journal entry may also include a reference number, such as a check number.
If you use accounting software or outsource your accounting, you may not see journal entries, but they’re still the key to ensuring your books are accurate and up to date. Think of them like rough notes you keep about your finances.
What are journal entries for?
Once business transactions are entered in your accounting journals, they’re posted to your general ledger. Think of “posting” as “summarizing.” The general ledger summarizes all your journal entries.
Financial statements are the key to tracking your business performance and accurately filing your taxes.They let you see, at a glance, how your business is performing.
Double entry bookkeeping
There are two methods of bookkeeping (and therefore, two methods of making journal entries): 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 accounting, 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 in your accounting system. 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 your cash account.
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 the accounts receivable (money clients owe you) ledger account:
Accounts Receivable Journal
|Nov. 3, 2019||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, 2019||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, 2019||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, 2019||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.
The above information is an overview of how journal entries work if you do your bookkeeping manually. But most people today use accounting software to record transactions. When you use accounting software, the above steps still apply, but the accounting software handles the details behind the scenes.
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.