A journal entry is a record of a financial transaction in your accounting books, written in a specific format that keeps debits and credits balanced. Every entry follows the same structure: you list the date, the accounts affected, the dollar amounts, and a short description of what happened. Once you understand how debits and credits work for different account types, the process becomes straightforward.
The Five Parts of a Journal Entry
A standard journal entry has five columns: the transaction date, the account names (sometimes called “particulars”), a reference or folio number, the debit amount, and the credit amount. Below the entry, you write a brief narration summarizing the transaction in plain language.
The transaction date is the date the transaction actually occurred, not the date you happen to record it. The account names identify which accounts are affected. The folio number is a reference code, numeric or alphanumeric, that links the journal entry to the corresponding page in your ledger. The debit column shows the amount being debited, and the credit column shows the amount being credited. In every valid journal entry, the total debits equal the total credits.
The format looks like this on paper or in a spreadsheet:
- Date: When the transaction happened
- Account debited: Listed first, with the dollar amount in the debit column
- Account credited: Listed second, indented slightly, with the dollar amount in the credit column
- Narration: A one-sentence description underneath
How Debits and Credits Work by Account Type
The part that trips people up is knowing when to debit and when to credit. The rule depends entirely on the type of account you’re working with. There are five account types, and each one responds to debits and credits differently.
Asset accounts (cash, equipment, accounts receivable): A debit increases the balance. A credit decreases it.
Expense accounts (rent, wages, supplies): A debit increases the balance. A credit decreases it.
Liability accounts (loans, accounts payable, credit cards): A credit increases the balance. A debit decreases it.
Equity accounts (owner’s equity, retained earnings): A credit increases the balance. A debit decreases it.
Revenue accounts (sales, service income): A credit increases the balance. A debit decreases it.
A quick way to remember: assets and expenses go up with debits. Liabilities, equity, and revenue go up with credits. Everything else is the reverse.
Step-by-Step: Recording a Transaction
Here’s how to work through any transaction from start to finish.
Step 1: Identify what happened. Read or observe the transaction. What did the business spend, earn, owe, or receive? For example, say you paid a freelance writer $500 from your checking account on February 2.
Step 2: Determine which accounts are affected. In this case, two accounts are involved: your checking account (an asset) and your labor expense account (an expense).
Step 3: Decide which account gets debited and which gets credited. You spent cash, so your checking account balance goes down. To decrease an asset, you credit it. Your labor expense went up. To increase an expense, you debit it.
Step 4: Record the entry. The finished journal entry looks like this:
- Date: Feb 2
- Debit: Expense: Labor — $500
- Credit: Checking Account — $500
- Narration: Freelance writer payment
Total debits ($500) equal total credits ($500). The entry balances.
Common Journal Entry Examples
Seeing a few real examples makes the pattern click faster than memorizing rules alone.
Buying Supplies on a Credit Card
You purchase $500 of building materials using your business credit card. The supplies are an expense (debit to increase), and the credit card balance is a liability (credit to increase).
- Debit: Building Materials — $500
- Credit: Business Credit Card — $500
Invoicing a Client for Services
You bill a client $1,000 for work completed. You haven’t received the cash yet, but the revenue is earned. Accounts receivable is an asset (debit to increase), and service revenue is income (credit to increase).
- Debit: Accounts Receivable — $1,000
- Credit: Service Revenue — $1,000
Receiving Payment From That Client
When the client pays and the money hits your bank account, you record the cash coming in and remove the receivable. Cash goes up (debit), and accounts receivable goes down (credit).
- Debit: Checking Account — $1,000
- Credit: Accounts Receivable — $1,000
Notice that each entry always has at least one debit and one credit, and the totals match. Some complex transactions involve three or more lines (called compound entries), but the balancing rule never changes.
Adjusting Entries at Period End
At the end of a month, quarter, or year, you’ll often need adjusting entries to make sure revenue and expenses land in the right period. These entries don’t record new transactions. They correct or update amounts so your financial statements reflect reality.
There are three main types of adjusting entries:
Accruals record revenue you’ve earned or expenses you’ve incurred but haven’t yet put on the books. If your employees worked the last week of December but won’t get paid until January, you accrue that wage expense in December. You debit wage expense and credit wages payable (a liability). When you earn revenue before receiving payment, you debit accounts receivable and credit revenue.
Deferrals handle money that moved before the related revenue or expense was actually used. If you paid a full year of insurance premiums upfront, that payment is a deferred expense, recorded as an asset (prepaid insurance). Each month, you shift one month’s worth from the asset into insurance expense with an adjusting entry: debit insurance expense, credit prepaid insurance. On the revenue side, if a customer pays you in advance for services you haven’t delivered yet, that cash is deferred revenue, which is a liability. As you deliver the work, you debit the liability and credit revenue.
Depreciation spreads the cost of a large asset like equipment or a vehicle across its useful life. Each period, you debit depreciation expense and credit accumulated depreciation (a contra-asset account that reduces the equipment’s book value over time). This is really a specific form of deferral, matching the cost to the periods that benefit from the asset.
Manual Entries vs. Accounting Software
If you use accounting software, many journal entries happen automatically. When you record a sale or pay a bill through the system, the software generates the debit and credit entries behind the scenes. These automated entries are imported from sub-ledgers or transaction feeds and don’t require you to think through the debit/credit logic each time.
Manual journal entries are the ones you type in yourself, typically for transactions the software can’t pick up automatically. Adjusting entries, corrections, and unusual one-time transactions are the most common reasons to create a manual entry. In most software, you’ll find a “Journal Entry” or “General Journal” screen where you select the date, choose accounts from a dropdown, type in the amounts, and add a memo. The software won’t let you save the entry unless debits and credits balance.
Even with automation handling routine bookkeeping, understanding the mechanics matters. Manual entries are a persistent source of accounting errors in businesses of all sizes, often because the person recording them isn’t clear on which account to debit or credit. Building that foundational knowledge, even if you rely on software day to day, helps you catch mistakes and understand what your financial statements are actually telling you.