How to write an accounting journal entry
/What is a Journal Entry?
A journal entry is used to record a business transaction in the accounting records of a business. These entries are essential for the proper recordation of transactions, so that an organization can issue accurate financial statements at the end of each reporting period. Without journal entries, it would be impossible to judge the financial performance or financial position of a business.
How to Prepare a Journal Entry
When preparing a journal entry, you must follow the rule that every journal entry must generate at least two equal and offsetting entries. This is because every transaction involves a change in at least two places in the accounting records, and the total of all debits and credits must balance. For example:
When you record a supplier invoice, it increases both an expense account and the accounts payable (liability) account
When you record a customer invoice, it increases both revenue and the accounts receivable (asset) account
When you buy a fixed asset, it increases the fixed assets account and decreases the cash account
When you pay employees, it increases the wage expense and reduces the cash account
Related AccountingTools Courses
The Format of a Journal Entry
The format of a journal entry is for the first column to contain the account name / number into which the entry is being made, the second column to contain the debit amount being entered, and the third column to contain the credit amount being entered. The account name / number of the account being credited is indented. It is also useful to include a unique journal entry identification number and the date of the entry, as well as a brief narrative description. If there are a large number of journal entries, you may also want to include an approval signature block, as well as a signature and date block for the person who enters the journal entry into the accounting software. The format of a basic journal entry is:
| Debit | Credit | |
| Account name / number |
$xx,xxx | |
| Account name / number |
$xx,xxx |
The basic structural rules of a journal entry are that there must be a minimum of two line items in the journal entry, and that the total amount entered in the debit column equals the total amount entered in the credit column.
Journal Entry Best Practices
There are several best practices related to writing journal entries, which are:
Always provide a complete narrative of why you have created the journal entry. Otherwise, someone reviewing the books at a later date will have no idea why the entry was created. This is a particularly important best practice when there are many people reviewing your journal entries (such as auditors), who would otherwise have no idea why the entry was created.
Do not include too many line items. Whenever possible, see if you can reduce a complex journal entry into several simpler ones, thereby making it easier to understand.
Use a journal entry template for recurring transactions, so that you avoid the risk of creating an incorrect entry.
Use an automatically reversing journal entry for accruals whose impact is intended to be for a single accounting period. By doing so, you do not have to worry about manually reversing the entry in the next accounting period.
Use a transaction module instead of a manual journal entry. If you can record a transaction with a standardized accounting module, such as the billing system or the accounts payable system, this is always better than doing so with a journal entry. A standardized module is pre-configured to collect and store a particular set of information, which you might otherwise be able to ignore with a manual journal entry.