Journal Entries 101
Recording transactions in chronological order — the first step in the accounting cycle.
Why This Matters
If accounting is the language of business, journal entries are the sentences.
Every financial transaction that happens—every sale, every expense, every loan payment—starts as a journal entry. It's the first step in the accounting cycle, and if you mess this up, every financial statement that follows will be wrong.
Master journal entries, and you master the foundation of accounting. This is where debits and credits come alive.
What Is a Journal Entry?
A journal entry is the formal record of a business transaction, showing:
- What accounts are affected
- How much each account changes
- Which accounts are debited and credited
- When the transaction happened
- Why it happened (brief explanation)
Think of it like writing in a diary—except instead of "Dear Diary, today I felt sad," you're writing "Dear Ledger, today Cash increased by $5,000 because we earned revenue."
The Golden Rule of Journal Entries
Every journal entry must have:
- 1At least one debit
- 2At least one credit
- 3Total debits = Total credits (always!)
If these three rules aren't met, the entry is wrong.
The Anatomy of a Journal Entry
Here's the standard format accountants use worldwide:
| Account | Debit | Credit |
|---|---|---|
| Account to Debit | $1,000 | |
| Account to Credit | $1,000 |
Date
When the transaction happened (not when you recorded it)
Account Names
Which accounts are affected by this transaction
Debit Column
Amounts on the left (increases assets, expenses)
Credit Column
Amounts on the right (increases liabilities, equity, revenue)
Indentation
Credits are indented to visually separate them
Explanation
A short note explaining the transaction (the 'narration')
Real-World Examples
Identify What Changed
- Cash increased by $5 (you received money)
- Sales Revenue increased by $5 (you earned income)
Determine Debits and Credits
- Cash is an asset → Assets increase with debits
- Sales Revenue is revenue → Revenue increases with credits
Write the Journal Entry
| Account | Debit | Credit |
|---|---|---|
| Cash | $5 | |
| Sales Revenue | $5 |
Verify the Accounting Equation
Assets ↑$5 = Liabilities (no change) + Equity ↑$5 (revenue increases equity)
Balanced! Both sides increased by $5.
The Journal: Where Entries Live
All journal entries are recorded in a journal (also called the "book of original entry"). Think of it as a chronological diary of every financial transaction:
| Date | Account Title | Debit | Credit |
|---|---|---|---|
| Jan 1 | Cash Owner's Equity (Initial investment) | 50,000 | 50,000 |
| Jan 2 | Equipment Cash (Purchased computers) | 15,000 | 15,000 |
| Jan 3 | Cash Service Revenue (Completed project for client) | 8,000 | 8,000 |
| Jan 5 | Salary Expense Cash (Paid employee wages) | 3,000 | 3,000 |
Chronological Order
Transactions listed by date
Complete Info
Date, accounts, amounts, explanation
Reference Column
For posting to the ledger (next step)
Types of Journal Entries
Simple Entry
Affects two accounts (one debit, one credit)
| Rent Expense | 1,000 | |
| Cash | 1,000 |
Compound Entry
Affects three or more accounts
| Equipment | 5,000 | |
| Cash | 2,000 | |
| Notes Payable | 3,000 |
Adjusting Entry
Made at period end to update accounts before financials
| Insurance Expense | 500 | |
| Prepaid Insurance | 500 |
(Expired insurance for January)
Closing Entry
Resets temporary accounts (revenue, expenses) to zero
| Service Revenue | 10,000 | |
| Income Summary | 10,000 |
(Close revenue to income summary)
Common Mistakes in Journal Entries
Mistake #1: Forgetting to Balance Debits and Credits
| Cash | $500 | |
| Sales Revenue | $300 |
Debits $500 ≠ Credits $300 — unbalanced!
| Cash | $500 | |
| Sales Revenue | $500 |
Total debits must always equal total credits.
Mistake #2: Debiting and Crediting the Wrong Accounts
| Sales Revenue | $1,000 | |
| Cash | $1,000 |
This decreases revenue and cash — backwards!
| Cash | $1,000 | |
| Sales Revenue | $1,000 |
Cash (asset) increases with debit. Revenue increases with credit.
Mistake #3: Not Including an Explanation
Without explanations, you'll forget why transactions happened. Three months later, what does "Cash $500 / Sales Revenue $500" mean? What sale? To whom?
Always include a brief explanation: "Cash sale to customer on 1/18/26"
Mistake #4: Recording on the Wrong Date
Journal entries should be recorded on the date the transaction happened, not when you learned about it or when you're doing the books.
Example: If you made a sale on January 15 but recorded it on January 20, the date should still be January 15.
Tips for Writing Great Journal Entries
Always Ask 'What Changed?'
Before writing the entry, identify exactly which accounts increased or decreased.
Use the Accounting Equation as a Safety Check
After writing the entry, verify that Assets = Liabilities + Equity still holds.
Be Specific in Your Explanations
Don't just write 'Paid rent.' Write 'Paid January rent to ABC Properties.'
Use Consistent Account Names
If you call it 'Accounts Receivable' in one entry, don't call it 'A/R' or 'Receivables' in another.
Double-Check Your Math
One typo can throw off your entire balance sheet. Verify debits = credits before moving on.
The Journal Entry Process
1. Analyze
What accounts change?
2. Classify
Asset? Liability? Equity? Revenue? Expense?
3. Apply Rules
Debit or Credit?
4. Record Entry
Date, Accounts, Amounts, Explanation
5. Verify
Debits = Credits? Equation balanced?
Key Takeaway
Journal entries are the first formal record of every business transaction. They show what accounts changed, by how much, and why—using debits and credits to keep the accounting equation balanced. Master this, and you've mastered the foundation of accounting.
Test Your Understanding
1. A business purchases $1,200 of inventory and pays cash. What is the correct journal entry?
2. You earn $5,000 in service revenue, but the customer will pay next month. What should you record now?
3. Which of the following is NOT required in a journal entry?
4. A business pays $800 for advertising using a credit card. What is the journal entry?
5. True or False: In a journal entry, debits must always equal credits.
Ready to Practice?
You now understand how to record journal entries. The Practice Lab is where you'll do it for real. Analyze transactions, write journal entries, and watch them flow into financial statements.